annual report 2009 charting the course to create and...

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

ANNUAL REPORT 2009

Contents

About First Energy Bank 3 Board of Directors 4 Sharia’a Supervisory Board 8 Executive Management 10

Chairman’s letter to shareholders 14 Message from the CEO 18 Financial Highlights 20 Business Activities 22

Corporate Governance 29 Financial Statements 37 Risk and Capital Management 83

FIRST ENERGY BANK ANNUAL REPORT 2009 1

We plan to further diversify our investment portfolio locally, in the region and on the larger global arena

2 FIRST ENERGY BANK ANNUAL REPORT 2009


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

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

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

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

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

FEB has a host of recent accomplishments highlighting the strength of its team and the soundness of its investment strategy. These include the floating of the MENAdrill Hercules I, the first offshore drilling rig launched by FEB’s inaugural project “MENAdrill”, the establishment of the Saudi Polysilicon project, the largest facility of its kind in both the Kingdom of Saudi Arabia and the MENA region, the acquisition of a 9% stake in the Al Dur Independent Water and Power Production (IWPP) project and the purchase of 40% of Arab Drilling and Workover Company (ADWOC) , a leading Libya-based onshore oil and gas well drilling and maintenance company from Global Santa Fe.

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


H.E. Hamad Rashed Al Neaimi - Vice Chairman

His Excellency Hamad Rashed Al Neaimi with a broad work experience of over 21 years, is the Chairman of Associated Group which possess around 50 companies under its umbrella. In addition to many key positions, his Excellency is a main shareholder in several companies such as Reem Investments and Al Mal Capital. He is also the Chairman of Real Estate Investment and Services Co, Chairman and Shareholder of Electronic Stock and Brokerage Co. His Excellency is the Managing Director of the Office of His Highness Sheikh Saeed Bin Zayed Al Nahyan, Managing Director of the office of His Highness Nahyan Bin Zayed Al Nahyan, and the Corporate Managing Director of the Office of His Highness Sheikh Diab Bin Zayed Al Nahyan.

Board of Directors

Mustafa Mohamed Zarti - Vice Chairman

Mr. Zarti is the Deputy CEO and member of the board of the Libyan Investment Authority (LIA) the Sovereign Wealth fund of Libya. He is also the Chairman and member of numerous oil and gas, investment and business institutions and has over 16 years of work experience.

Abdulla A. Kareem Showaiter - Board Member

Mr. Showaiter is the Deputy Chief Executive Officer of Emirates Islamic Bank with a total of 32 years of work experience. He is a board member in numerous financial institutions and companies such as Khaleeji Commercial Bank, Al Salam Bank and Mada’en Real Estate, Awqaf and Minor Affairs Foundation – Dubai Government.

Mohammad Ali Al Fahim - Board MemberMr. Al Fahim has a degree in Finance from the University of Suffolk, Boston (1999) and has over 11 years of finance experience working within Abu Dhabi entities. He is also a board member in various companies in the Gulf region and Europe.

Esam Yousif Janahi - Chairman

One of the main founding members of First Energy Bank, Mr. Janahi holds numerous directorships including Chairman of Gulf Finance House (GFH), Bahrain Financial Harbour, Energy City Qatar, Royal Ranches Marrakech, Royal Resort Cap Malabata and Gulf Holding Company; Vice Chairman of Al Areen Holding. Mr. Janahi holds a Masters Degree in Business Administration from Hull University, United Kingdom and a Bachelors Degree in Industrial Management (Hons.) from University of Petroleum and Minerals, Kingdom of Saudi Arabia. With over 22 years of banking experience, including 8 years as CEO of GFH, Mr. Janahi is regarded as one of the most successful bankers in the Middle East.


H.E. Ahmed Saif Al Darmaki - Board Member

H.E. Ahmed Saif Al Darmaki is the Managing Director of The Chairman’s Office and the Planning & Development Director of Abu Dhabi Water & Electricity Authority. Also, he has been working as the Chairman of Abu Dhabi Water and Electricity Company, the Deputy Chairman of the Board of Directors for Abu Dhabi National Energy Company (TAQA), as well as a Board Member in Abu Dhabi Future Energy Company (MASDAR). In addition, Mr. Al Darmaki is a Board Member in several Governmental, Semi-Governmental, and Private Firms and Organizations in the UAE and has 15 years of work experience.

Khalid Kalban - Board Member

Mr. Kalban Managing Director and Chief Executive Officer of Dubai Investments, and member of the board of directors of Emirates National Bank of Dubai, Emirates International Brokerage LLC, Arab Insurance Group and Thuraya Satellite Communications-Telecommunications Company.

Mr. Kalban also has a wide experience and thorough knowledge in managing big establishments, particularly those specializing in insurance services, financial services, chemicals and communications. His experience was gained during his career of 27 years.

Adel Abdulaziz Al Jabr - Board Member

Mr. Al Jabr is a Board Member of Al Jabr Trading Company “premier regional leading group of companies in fields of Auto Motors (NISSAN & KIA), Real Estate, Beverages, Home Appliances and Laundries”.

He is also the General Manager of Al Jabr General Contracting Company “A leading company in the field of Electro-Mechanical works in Saudi Arabia”, General Manager of Golden Chip Company “A newly established company that works in the field of smart and plastic cards industry at K.S.A”.

Mr. Al Jabr represents Al Jabr Group of Companies with a total experience of 19 years.

Khalid Mohamed Najibi - Board Member

Mr. Najibi is the Vice Chairman and the Managing Director of Capital Management House B.S.C. and currently holds several key positions including Director and Chairman of Executive Committee of Bahrain Islamic Bank, Abaad Real Estate Company B.S.C, and is a founder member and Executive Director of Najibi Investment Company and Chairman of The Libya Fund. He is also a Board Member of Arbah Capital (Saudi Arabia) and QInvest LLC (Qatar). Mr. Najibi represents Capital Management House and Bahrain Islamic Bank’s stake in First Energy Bank. Mr. Najibi has over 19 years of experience.

Sadoun Bin Bargash Al Sadoun - Board Member

Worked in Several oil and gas companies such as: KNPC, Petromin and Saudi ARAMCO with a total experience of 20 years.

Joined MIDROC International Group (Owned by Sheikh Mohammed Al Amoudi) in 1989 and now President of ABV Rock Group KB. He is also the Chairman of two oil and gas companies in Saudi Arabia and member of the board of directors in five different companies within the MIDROC Group.


Board of Directors (continued)

Mehran Jamsheer - Board Member

Mr. Jamsheer is currently a board member in several renowned companies and institutions such as: Bahrain aluminium extrusion company, Gulf Holding and Bahrain Financial Harbor with over 14 years of experience. Mr. Jamsheer was the Deputy CEO of Gulf Finance House managing all the Front Office functions, responsible for directing and management of deals and taking the lead in generating business development. Prior to joining Gulf Finance House Mr. Jamsheer spent 8 years at Arthur Andersen as an Audit and Advisory Manager.

Hesham Al Emadi - Board Member

Mr. Al Emadi is the Chief Executive Officer of Energy City Qatar, Libya and India; prior to which, he held a number of key positions in the energy and investment industry and established an Industrial Assessment Programme in all of the GCC in order to help improve and make a difference in the energy sector. Having been a Senior Researcher, Industrial Investment expert and having 17 years of experience in the field of Energy, Mr. Al Emadi has valuable know-how of the industry specially that of the GCC.

Ebrahim Hussain Ebrahim - Board Member

Mr. Ebrahim is the Chief Executive Officer and Board Member of Khaleeji Commercial Bank and was instrumental in setting up the bank since inception. Prior to joining Khaleeji Commercial Bank, has worked with a number of prominent financial institutions in Bahrain. Mr. Ebrahim has over 26 years of experience in both Islamic and conventional banking and is a holder of a Master of Business Administration with a concentration in Finance.

Note: Currently all members of the Board of Directors are non-executive and non-independent members.


We are set to ride the upward trend that the energy industry is bound to experience in the coming months


Sharia’a Supervisory Board

First Energy Bank is guided by a Sharia’a Supervisory Board consisting of three distinguished scholars, they review the bank’s activities to ensure that all products and investment transactions comply fully with the rules and principles of Islamic Sharia’a.

Sheikh Nizam Mohammed Saleh YaqubiSheikh Nizam Mohammed Saleh Yaqubi is a well-known Sharia’a Scholar and is recognized internationally. He is on the Sharia’a Supervisory Board of many Islamic financial institutions such as The Accounting and Auditing Organization for Islamic Financial Institutions, Khaleeji Commercial Bank, Shamil Bank, Bahrain Islamic Bank, and Executive member of Gulf Finance House, Abu Dhabi Islamic Bank, and a member of the Sharia’a Supervisory Boards of many other leading Islamic banks. He has contributed to the creation of many AAOIFI Sharia’a standards, participated in many Islamic finance and banking conferences around the world.

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

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

In addition to his position at the King Abdulaziz University, he is affiliated with a number of organizations and financial institutions. Among them being a member of the Sharia’a committees at the National Commercial Bank, Islamic Citibank, Arab National Bank and the Dow Jones Islamic Index. Dr. Elgari is also on the editorial boards of several Islamic journals, and an advisory member on the Harvard Series on Islamic Law. He also held the title of director of the Centre for Islamic Economics Research.

Dr. Elgari has participated in various conferences and seminars, both locally and overseas. Extensive research in the field of Islamic economics and finance has lead to a number of his works published in recognized journals and presented at relevant conferences. Among them being topics on fiscal deficit in Islamic economics, setting up Sharia’a compliant credit cards and banking systems, role of Islamic mutual fund and risk management, and issues facing Islamic banks and investments.

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

Sheikh Dr. Mohamad Akram Laldin Dr. Mohamad Akram Laldin is currently the Executive Director of International Sharia’a Research Academy for Islamic Finance (ISRA). Prior to joining ISRA he was an Assistant Professor at the Kuliyah of Islamic Revealed Knowledge and Human Sciences, International Islamic University, Malaysia (IIUM). At present he is the Member of four HSBC Committees associated with Sharia’a, he’s a member of the Amanah Global Advisory Board, Member of Yassar Limited Sharia’a Advisory Board, Sharia’a Advisor to the Equity Trust Malaysian Berhad and Advisor to ZI Syariah Advisory Malaysia.

Dr. Akram holds a B.A Honours degree in Islamic jurisprudence and Legislation from the University of Jordan, Amman, Jordan and a PhD in Principles of Islamic Jurisprudence (Usul al-Faqh) from the University of Edinburgh, Scotland, United Kingdom. In addition he is also a prolific author of academic works specifically in the areas of Islamic Banking and Finance.


Vahan Zanoyan

Chief Executive Officer

Before joining First Energy Bank (FEB), Zanoyan has been serving as the Chairman and CEO of PFC Energy International, through which he brings critical expertise and experience in the global energy sector to the bank. Prior to this he spent ten years as President and CEO of PFC Energy, one of the most respected global advisory firms in the energy industry. Zanoyan has a long, and respected, history of over 36 years working in the energy industry and is well placed to lead the development of the Bank.

Zanoyan is responsible for overseeing the development of all aspects of the Bank’s business, including the overall investment strategy, building of a strong team and capabilities in the energy sector, representing the Bank in the global energy sector, and originating and screening of investment opportunities.

Educated at The American University in Beirut and at the University of Pennsylvania, Zanoyan has done pioneering work in applied analysis of the political economies of oil producing countries and their development process during the past two decades. He is a member of the Council on Foreign Relations, he has published many professional articles in specialized media on energy, and has given countless lectures and speeches at professional conferences on the same subject.

Executive Management


We are diversifying our business strategy, and aiming for steady return generation in renewables, oil, gas, energy services and energy infrastructure


Mohammed H. Al-Nusuf Deputy CEO – Chief Placement Officer

Under his current capacity, Al-Nusuf is responsible for all aspects of private placement transactions, from originating to structuring and execution. Al-Nusuf is responsible for placing private capital transactions to financial institutions, as well as the evaluation of client opportunities and generating origination ideas.

Al-Nusuf joined First Energy Bank (FEB) in July 2008 coming from Gulf Finance House (GFH) where he held the position of Senior Executive Director (Regional Head) of Placement for the UAE, Oman and Yemen markets, and was responsible for the marketing and product placement to GFH’s diverse client base of high net worth individuals, family-owned conglomerates, financial institutions and sovereign wealth funds based throughout the gulf and MENA region.

Prior to joining GFH in 2004, Al-Nusuf held prominent positions for the past decade in a variety of financial firms based in Bahrain including ABC Islamic Bank and National Bank of Bahrain.

Al-Nusuf brings to FEB over 13 years of significant experience namely in the structuring of Islamic financial transactions and in the arrangement of syndications between some of the region’s largest and most reputable financial institutions.

Al-Nusuf holds a Bachelor of Science (Major in Finance) from the American University- Washington DC, USA.

Mohamed Shukri GhanemDeputy CEO - Chief Investment and Business Development Officer

Ghanem brings to First Energy Bank (FEB) over 10 years of extensive experience in the regional financing market and in global energy issues. He has overall responsibility for the investment function at FEB, including the design and implementation of investment processes for all clients. Ghanem provides high level strategic investment advice including the investment processes and the additional asset classes and investment vehicles across the entire client base. He is also partly responsible for expanding the client base by ensuring the investment strategy is solid and sustainable.

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

Before joining ABC, Ghanem worked with the Organization of the Petrochemical Exporting Countries (OPEC) in Vienna where he worked on analyzing the global energy markets and the industry trends and wrote a number of research papers in his field.

Prior to OPEC, Ghanem worked with GED Handles G.m.b.H., Vienna in the risk and asset management in the energy and metals sectors. He worked in the trading department as a senior trader specializing in oil futures and options.

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

Executive Management (continued)


Frank Archibald

Chief Operating officer

As the Chief Operating Officer (COO) at First Energy Bank (FEB), Archibald is responsible for all Operational matters within the Bank and brings more than 31 years of strategic and tactical experience in management, project leadership and implementation of effective business strategies across Europe, North America and Asia Pacific to his new role.

An Australian National, Archibald has worked in numerous leadership positions across Europe, North America and Asia, and has demonstrated talent in selecting and building strong management teams in the rapid financial and operational growth of companies in various sectors, and has been actively involved in an interim capacity at the highest levels of management both short and long term.

Archibald began his management career at one of the world’s “Big Four” consultancies KPMG in Hong Kong, where he remained for 13 years leading consultants in a broad range of business activities throughout Asia and Australia, which resulted in him becoming a member of the global management, responsible for KPMG’s overall business strategy.

Following this term, he held various fixed term Director and advisory posts across multiple sectors including Asia Oceana in China, where he was selected to supervise all aspects of the establishment of a manufacturing operation, incorporating feasibility studies, capital raising, infrastructure establishment and training of staff. He went on to hold a Directorship at EDS, Australia, where he was selected to establish an Asia Pacific Government practice for the industry leader in the application of IT with over US$8.5 billion in revenue.

As a skilled senior consultant, Archibald also held interim advisory positions with Compaq / HP, Asia Pacific, IBA Health Care, Europe, National Australian Bank and GE Healthcare, Australia, where he consulted on business assessment and restructuring, outsourcing operations, recruitment, mergers and acquisitions and training and mentoring.

Following his 20 years of experience in short and long term management consultancy, prior to joining FEB. Archibald successfully established and ran F Archibald & Co., providing a wide array of related services such as contract negotiations, strategic business planning, interim senior level management and operation support services to diverse clients. Archibald held the position of Director & Interim Manager for over 12 years, advising high profile clients.

Archibald is recognised as an adept and experienced manager, with an excellent track record of managing and driving strategic plans forward to successfully grow and expand businesses. He is a Fellow of the Institute of Company Directors, the Chartered Management Institute, the Institute of Management Consultants, and the Australian Institute of Management.


Dear Shareholders,

On behalf of the Board of Directors, it is my privilege to present First Energy Bank’s second annual report, for the year ending 31 December 2009.

The climate in the energy industry, as in many industries, grew considerably more tumultuous in 2009 than in our inaugural year. However, having entered the market on the downswing of the cycle, I am happy to say that we have made good use of the opportunities available to us, a relatively new bank, with a solid and intact capital base and with a skilled and experienced team leading our various business activities.

Considering this, it is noteworthy that we were able to make 2009 into a landmark year for FEB, though not really a surprise considering the exceptional strength of our investor base. We ploughed ahead with our plans for the year, diversifying our business strategy by targeting the full spectrum of the energy industry. A significant accomplishment of the year was the acquisition of a 9% stake in the Al Dur Independent Water and Power Production project in our home country of Bahrain. Continuing the business strategy diversification process, we also partnered with Project Management and Development (PMD) in Saudi Arabia to establish Saudi Polysilicon, a major polysilicon production facility to be based in Al Jubail, KSA. We have also successfully completed the purchase transaction of 40% of Arab Drilling and Workover Company (ADWOC). And finally, 2009 saw the closing of MENAdrill, our inaugural offshore drilling venture, which is set to benchmark drilling operations in the region in the very near future.

The year ending 31st December 2009 saw net profits for FEB reach US$ 14.2 million, as compared to US$ 42 thousand for 2008. Revenues on the other hand, were clocked at US$ 47.4 million, compared to the bank’s 2008 figures of US$ 17 million. Total operating costs were approximately US$ 33.2 million.

2009 Milestones

The second Annual General Meeting was held on 9 July 2009, during which a positive review of the inaugural year took place, and plans for implementing the pipeline of deals that still holds sway today were reaffirmed. A commitment to continue developing FEB’s already strong team was also voiced, and the results of that commitment can be seen in the experience and skills set brought to the table by each of the 77 members of the FEB staff. This number is continuing to grow as we evolve and grow our business in the Kingdom, the region and around the world.

We are happy to say that FEB also marked 2009 by moving into its new offices at the Bahrain Financial Harbour, establishing a headquarters from which we are able to continue our drive to realise our potential.

As mentioned, we acquired a significant share in the Al Dur Independent Water and Power Production project, and became one of five new Bahrain-based shareholders to enter into the project. Set to meet the rising demand for water and electricity in the Kingdom, it is an important infrastructure investment and one that will help improve the lives of the people of Bahrain.

The fourth quarter of 2009 saw our entry into the alternative energy sector, with the establishment of Saudi Polysilicon. Set to become one of the lowest cost polysilicon producers in the world, this represents a significant milestone for FEB and for the advancement of the alternative energy industry in a region starved for diversified energy sources such as solar power.

Chairman’s letter to shareholders


Esam Yousif Janahi - Chairman


Also in the fourth quarter FEB has purchased 40% of Arab Drilling and Workover Company (ADWOC) one of the leading oil and gas onshore contract drilling and workover companies based out of Libya.

Finally, 2009 saw the closing of MENAdrill, a project we are really very proud of. Set to boost and help develop the region’s maritime and offshore drilling industry, MENAdrill is gearing up to become a major player, and one of the largest of its kind, in the region, with the first of its rigs set to be floated in the first quarter of 2010.

2010 Plans

We are set to ride the upward trend that the energy industry is bound to experience in the coming months. We are extremely happy with the state of our business right now. The year ahead looks promising not just because we have teams of experts in place covering all our business areas who bring years of experience and expertise to the table, but also because we are blessed with a solid investor base and intact capital backing. We expect 2010 to become yet another monumental year for FEB, and as such are aiming to substantially increase our balance sheet by the end of the year. To accomplish this task, we plan to further diversify our investment portfolio locally, in the region and on the larger global arena.

Our People

It is with pride that I say none of our accomplishments would have been possible without the dedication and commitment shown by the FEB family. 2009 was one of the most difficult years in recent memory for a lot of organisations, and to have come out so very far on top of the game is a clear indication of just how experienced and skilled our team is. It is now, and ever will be, one of our prime objectives to continue filling our ranks with the best and the brightest the industry has to offer. In this way we can ensure that 2010, and beyond, will be as successful if not more successful than 2009.

Yours truly,

Esam Yousif Janahi

Chairman’s Letter to Shareholders (continued)


The year ahead looks promising not just because we have teams of experts in place covering all our business areas who bring years of experience and expertise to the table, but also because we are blessed with a solid investor base and intact capital backing


Message from the CEO

The continued state of flux in the global economic climate has led to number of consequences not only for the

regional and global economies, but also for the global energy sector. First Energy Bank (FEB), the world’s first

energy-dedicated Islamic investment bank, has taken this in stride and already established itself as a financial

player in a diversified segment of the energy industry. We are a relatively new organization, established in

2008, however we have set the foundations of a solid energy portfolio during our first full year of operations

during 2009.

FEB has a global mandate, although we are committed to contributing to the growth of the region where

enormous potential exists in the entire value chain of the energy industry. In this vein we are diversifying our

business strategy, and aiming for steady return generation in renewables, oil, gas, energy services and energy

infrastructure. This diversification by country and by sector can be seen in our project portfolio, with our most

recent partnership with Saudi Arabian Project Management and Development (PMD) to build a polysilicon

plant in the Kingdom of Saudi Arabia to meet the fast-rising demand for solar energy. This plant is slated to be

one of the lowest cost polysilicon producers in the world.

Testament to our diversification is another of our 2009 investments, a nine per cent stake, valued at US$50

million, in the Al Dur Independent Water and Power Production (IWPP) project in the Kingdom of Bahrain.

Such projects, which respond to a need in the market and are sustainable, are how we mitigate risk for our

clients. In Al Dur, we see that there is a rising demand for power in Bahrain, and this project will produce 1,234

megawatts of power and 48 million gallons of water when operational, as well as create many jobs.

Vahan Zanoyan - CEO


In addition to the above we have purchased 40% of Arab Drilling and Workover Company (ADWOC), a leading Libya-based

onshore oil and gas well drilling and maintenance company from Global Santa Fe.

And finally, 2009 saw the closing of MENAdrill, our inaugural offshore drilling venture, which is set to benchmark drilling operations in the region in the very near future.

It is fair to say that in spite of the global economic recession, there is a chronic shortage of energy production capacity in the world, and during the next 2-3 years we will be capitalizing on this and building a truly substantial portfolio of energy sector projects. We also hope to see our balance sheet double during this period.

Vahan Zanoyan


Financial Highlights

The Bank began its commercial operation from 23 June 2008 and has accomplished its first full year of operation in 2009. During the year, the bank successfully invested part of its capital in few private equities, sukuks and Islamic financing. The following financial highlights of the year 2009 shows the steady improvement in Bank’ assets and income in spite of the continuation of global financial turmoil which began in mid 2008. The gross income is grown by 2.8 times and the net income is grown by 337 times. The operating expenses of 2009 include the asset impairment provision of US$ 8,734 towards the land purchased by the Bank to build its office structure. Total equity includes U$ 37,674 of non-controlling interest of the Bank’s subsidiaries.

OPERATINGEXPENSES

PRE-OPERATINGEXPENSES

TOTAL EQUITY

EARNINGS PER SHARE(BASICS) (US CENTS)

GROSS INCOME

NET INCOME

TOTAL ASSETS

RETURN ON AVERAGE ASSETS

COST TOINCOME RATIO

RETURN ON AVERAGE EQUITY

NET INCOME MARGIN

7,997

8,986

1,000,042

0.004

17,025

42

1,021,191

0.004%

47.00%

0.004%

0.25%

33,210

-

1,054,677

1.42

47,410

14,200

1,233,919

1.27%

70.05%

1.39%

29.95%

23 June to 31 December 2008

Amount in USD ’000

12 month ended on 31 December 2009


First Energy Bank’s (FEB) business model is built around 7 core business lines: Project Development, Private

Equity, Islamic Finance, Asset Management, Mergers & Acquisitions, Trade Finance and Treasury.

Project Development

The Middle East and North Africa (MENA) region is the world’s major holder of various energy related resources.

Developing and producing these resources and converting them to the products needed by the global economy

require substantial investments in the energy sector and at different levels of the value chain.

FEB utilizes its strength to develop industrial projects drawing on all its available resources along with aligning

itself with strategic partners that it has access to in energy industry. FEB’s unique strength in this field comes

from its strong and diversified shareholder base combined with the management team’s experience in the

industry.

In order to capture and maximize value for FEB’s investors, the project development process starts from the early

stage of conceptualizing the business idea and developing it to achieve a successful business.

Building on FEB’s financial strength, experience and solid balance sheet, the project development line enjoys the

support of a range of other complementing products and services including financial advisory and Islamic finance

which are essential elements to achieve a complete and well structured venture.

Private Equity

FEB offers its clients direct investments in private equity opportunities that it identifies in the MENA region

specifically as well as in the international arena. The Division’s investment strategy is based on two pillars.

The first is to identify and invest in regional entities where FEB has a strong presence. FEB would add value

through various activities venues including increased capitalization, financial restructuring, and effective market

expansion utilizing the Bank’s extensive network and expertise in these fields. The second investment route is

to identify opportunities in the international market. These opportunities are required to have distinct areas

of strengths such as technology, technical expertise, know how, superior assets class, etc. FEB capitalizes on its

effective network and marketing capabilities to maximize the value of the investment in the region through

business expansion and setting up new joint ventures.

Mergers and Acquisitions

The recent turmoil in global financial markets and short term corrections in energy prices, combined with

expected recovery in demand growth, create attractive opportunities for mergers and acquisitions (M&A). The

FEB M&A team has a proven track record in successfully executing major transactions across the MENA region.

This expertise, backed by FEB’s considerable financial strength, will allow FEB to exploit market opportunities to

earn superior returns for its clients.

Trade Finance

FEB draws from its strength in the GCC and MENA region and its extensive familiarity with the energy players

and financial institutions. It is well positioned to provide various trade finance services to these entities. This

service includes the issuing of L/Cs, L/Gs and confirmation. FEB has dedicated team members to service north

Africa and the Gulf privind trade finance products and services.

Business Activities


Focusing on projects that will both enhance the sector and offer to our investors the greatest opportunities for success and prosperity


Business Activities (continued)

Islamic Financing

Islamic finance has been one of the fastest growing finance segments in recent years. It has proven to be a resilient

and valued sector especially in the Middle East. FEB’s Islamic finance team focuses on providing structure and

financial advisory services that draw on many years of experience in this field and across the region. The team

also focuses on providing “ring fenced” Sharia’a compliant project and structured finance to selected strategic

transactions where risks are mitigated by these structures and returns are maximized.

Asset Management

Investors’ demand for Sharia’a compliant investment products has been increasing in recent years. FEB’s strategy

is to provides innovative, diversified and well managed products that suit its clients’ needs and meets their return

requirements. The FEB team is committed to continuously develop products, providing a well diversified selection

of rewarding investments.

Treasury

The Islamic banking treasury sector has become increasingly competitive and sophisticated over the years,

with demand being fueled by clients and investors expecting Islamic products to be available to provide the

same features and benefits as the conventional investment and hedging products. As such, FEB has laid a solid

foundation to cater for the fast growing demand of Islamic products offering a wide range of Sharia’a complaint

products managed by a team of dedicated personnel.


Projects and Investments

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

MENAdrill will focus on providing contract drilling services for offshore exploration and development in the Middle East, North Africa and Southeast Asia.

MENAdrill aims to become one of the key drilling companies based in the region, allowing it to capitalize on the significant levels of drilling activity required to increase offshore oil and gas production throughout the region. MENAdrill’s initial assets include two Super M2 jackup drills being constructed at the Maritaime Industrial Services (MIS) in Sharjah. The first rig “MENAdrill Hercules I” was successfully floated in 28 March 2010 with the second rig “ MENAdrill Hercules II” expected to float in May, both rigs are scheduled for final delivery in the fourth quarter of 2010. MENAdrill signed a management agreement with Hercules Offshore Arabia, a leading provider of offshore contract drilling.

Saudi PolysiliconSaudi Polysilicon is a world class polysilicon production facility. The first of its kind and scale in the region, it will be located in the Kingdom of Saudi Arabia, and will cover a total area of 375,000 square meters in Al Jubail Industrial City 2.

The project is spearheaded by the strategic partner, First Energy Bank (FEB) and the techno-commercial developer, Project Management and Development Company (PMD), a Saudi based industrial group. It is being sponsored and developed by Cosmos Industrial Investment Corporation, a subsidiary of FEB.

The project will use advanced and commercially proven technologies in its production processes deriving benefits from the economies of scale and will be one of the lowest cost polysilicon producers in the world. It will also aim to promote green and sustainable energy solutions leading to further economic diversification and expansion of the industrial base.

The Polysilicon project is expected to begin production in 2013 and will have a total production capacity of 7,500 tons per annum of high quality polysilicon product capable to cater users in the solar photo voltaic power as well as electronics industry markets. The future expansion of the project facility (second phase) will include investments in downstream sectors such as the manufacturing of ingots, wafers, cell and modules.

Al DurDuring 2009, FEB successfully completed a 9% stake acquisition in the Al Dur Independent Water and Power Project (IWPP), the largest of its kind in the Kingdom of Bahrain. This is part of FEB strategy of building up a book of top quality energy related infrastructure assets.

The Al Dur project is located on the southeast coast of the Kingdom and is valued at a total of USD2.2 billion. It is expected to produce 1,234 megawatts of power and 48 million gallons of water per day when operational. This project represents an important addition to the Kingdom of Bahrain and will help meet the rising demand for both power and electricity going forward.

ADWOCFEB has acquired a 40% stake in the Arab Drilling and Workover Company (ADWOC), one of the leading oil and gas onshore contract drilling and workover companies based out of Libya. Established in 1980, ADWOC has been providing its drilling and workover services across the Arab World. The ADWOC acquisition fits well into FEB’s investment portfolio as it provides the bank with the diversity and strong foundation necessary to support future expansion in this sector. Additionally, it complements some of the other investments that the Bank is involved in, including the offshore drilling investment of MENAdrill.

Business Activities (continued)


Corporate Governance


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

Board Of Directors

FEB’s governance structure comprises the main Board of Directors (the Board) and its sub-committees. There are thirteen dependent non-executive Directors on the Board. Their names are listed below:

NameEsam Yousif JanahiH.E. Hamad Al NeaimiMustafa ZartiAbdulla ShowaiterMohamed Ali Al-FahimH.E. Ahmed Al DarmakiKhalid KalbanSadoun Al SadounAdel Al JabrKhalid NajibiEbrahim HussainMehran JamsheerHesham Al Emadi

DCEO & Chief BD & Investment Officer DCEO & Chief Placement Officer COO

Marketing

Board of Directors Audit Committee

Board Risk Committee

Board Investment Committee

Sharia’a Board

Risk

Treasury

Internal Audit

Nomination and Remuneration Committee

Legal andCompliance

Regional Head Bahrain & Qatar

Regional Head KSA

Regional Head Kuwait

Regional Head UAE, Oman & Yemen

Branding & Creative Strategy

Investor Relations & Events

PR/Media Relations

Corporate Communications

Regional Head Other ME & N Africa

Regional Head SE Asia

Regional Head ROW

Regional Head Iran

Regional Placement Teams Investment Banking Islamic Finance

Pre-screening & Pre-Feasibility

Islamic DCM/IPO

Islamic Finance Advisory

IPT Administration

IPT Advisory

CEO

Venture Capital, Private Equity& Direct Investments

Project Development

M & A and CorporateFinance Advisory

Regional Investment GCC,N Africa, SE Asia, ROW

Operations

Information Technology

Financial Control

Human Resources & Administration

Corporate Governance


There are four Board sub-committees, namely: the Audit Committee, the Risk Management Committee, the Investment Committee and the Nomination and Remuneration Committee. Each is required to report its activities to the Board on a regular basis Their functions and membership are described as follows:

Audit Committee

The primary responsibilities of this Committee are:

• ToreviewtheintegrityoftheBank’sfinancialreporting,includingthechoiceofaccountingpolicies.

• ToensuretheinformationneedsoftheBoardtoperformitsmonitoringresponsibilitiesaremet.

• Tooverseetheselectionandcompensationoftheexternalauditorforappointmentandapprovalattheshareholders’meeting.

• Tooverseerelationswiththeexternalauditors,includingensuringtheexternalauditor’sindependence(inparticular,makingsurethatthe external audit firm and its partners have no other financial or business relationship without the Board’s knowledge); reviewing the terms and conditions of the auditor’s appointment; monitoring rotation arrangements for audit engagement partners; monitoring the performance of the external auditor and any non-audit services provided by the external auditor; and meeting with the external auditor at least twice per year (and at least once per year in the absence of any members of executive management).

• Toregularlyreviewtheactivitiesandperformanceoftheinternalauditfunction.

• ToreviewwhethertheBankcomplieswithallrelevantlaws,regulations,codesandbusinesspractices.

• ToensurethattheBankcommunicateswithshareholdersandrelevantstakeholders(internalandexternal)openlyandpromptly,withsubstance of compliance prevailing over form.

• Toreviewandsupervisetheimplementationof,enforcementofandadherencetotheBank’scodeofconduct.

Generally, the Committee assists the Board in fulfilling its oversight responsibilities by reviewing the financial information which will be provided to the shareholders and others, the systems of internal controls which the management and the Board have established and the audit process and acts as an informed, vigilant and effective overseer of the Bank’s internal controls and financial reporting processes. It also provides an open avenue of communication between the Board, management, the internal auditors and the independent accountants.

The following persons are members of the Audit Committee:

Audit Committee

Name

Ebrahim Hussain (Chairman)

Khalid Najibi*

Hesham Al Emadi

Adel Al Jabr

* Qualified and experienced accountant

Risk Management Committee

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


The following persons are members of the Risk Committee:

Risk Committee

Name

Khalid Najibi (Chairman)

Ebrahim Hussain

Hesham Al Emadi

Adel Al Jabr

Nomination and Remuneration Committee

The Nomination and Remuneration Committee, mindful of best practice in the field, assists the Board in formulating and reviewing the Bank’s relevant policies and rules including the administrative policy. It handles the nomination, remuneration and compensation of the Board and Executive Management and regularly reviews the Bank’s succession plan.

The following persons are members of the Nomination and Remuneration Committee:

Nomination Committee

Name

Esam Yousif Janahi (Chairman)

H.E. Hamad Al Neaimi

Abdulla Showaiter

Khalid Najibi

Adel Al Jabr

Investment Committee

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

The following persons are members of the Investment Committee:


Name

Esam Yousif Janahi (Chairman)

H.E. Hamad Al Neaimi

Mustafa Zarti

Mohamed Ali Al-Fahim

H.E. Ahmed Al Darmaki

Abdulla Showaiter

Sadoun Al Sadoun

Mehran Jamsheer

Corporate Governance (continued)


Sharia’a Compliance

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

• Ensuring programmes are in place for all approved products, with detailed procedures signed off by relevant departments.

• EnsuringthereareFatwassupportingallapprovedproductsandthattheconcerneddepartmentsadheretothem.

• EnsuringthattheBankcomplieswithapplicableAAOIFIstandards,theSSB’sandotherapplicableSharia’aguidelinesandtheBank’sSharia’a compliance manual.

• ConductingperiodicSharia’aaudits,discussingtheauditfindingswithmanagementandissuingcompliancereports.

• ReportingtotheCEOandSSBontheresultsoftheSharia’aauditsandthestatusofimplementationoftherecommendationsmadebythe Sharia’a Department.

• AssistingrelationshipmanagersandrelevantdepartmentsininterpretingSharia’aguidelines.

• CollatinginquiriesandquestionsfromBankdepartmentsandsubmittingthemtotheSSB.

• ArrangingandminutingSSBmeetings.

Management Committees

The Bank has established 5 Management Committees, both to support the Board committees in carrying out their duties and to ensure appropriate controls and processes are in place. They are the Risk Management Committee (RMC), the Investment Committee (IC), the Credit Risk Committee (CRC), the Asset and Liability Committee (ALCO) and the Nomination & Remuneration Committee (NRC). The terms of reference of each committee are derived from the terms of reference of the corresponding Board committee. Management committees meet monthly and report to the Board quarterly or more frequently if required or requested.

Each Committee has an ‘owner’ who is responsible for ensuring relevant business matters are brought to the committee for consideration and decision; circulating information papers ahead of meetings; forward planning of matters to be considered by the committee over the next 2 months; ensuring the meeting immediately preceding the Board meeting discusses items on the agenda for the Board meeting; and circulating minutes promptly after meetings.

Committee memberships are as follows:

Members RMC IC CRC ALCO NRC

CEO 3 3 3 3 3

Chief Investment Officer 3 3 3 3 3

Chief Placement Officer 3 3 3 3 3

Chief Operating Officer 3 3 3 3 3

Head of Risk and Credit Owner 3 Owner 3

Head of Investments 3 Owner 3 3

Head of Treasury 3 3 3 Owner

Head of HR & Administration Owner

Head of Islamic Finance 3 3 3

Head of Sharia’a Compliance & Advisory 3

Financial Controller 3


Risk Management Committee

The RMC is the principal body through which the CEO controls and coordinates the management of all risks of the Bank. The principal functions of the RMC are to:

• RecommendriskstrategytotheBoardforapproval.

• RecommendriskpoliciestotheBoardforapprovalandapproveproceduresandmethodologiesformeasuringand monitoring of risk.

• DefineandsetriskparametersandbenchmarksconsistentwiththeBank’sstrategicbusinessobjectivesandrisk profile.

• Ensure the implementation of approved risk policies by promoting a strong control environment andmonitoring the implementation of the risk management framework by managers.

• ProactivelyreviewtheBank’sriskprofileandensureitiswithintheriskparametersapprovedbytheBoard

• Review theBank’s provisioning requirement and capital adequacy and allocate capital to businesses asrequired.

• Monitor the Risk Management and Credit Department (RMCD), which is responsible for day-to-daymanagement of risk as well as making appropriate recommendations to the Board RMC.


The Investment Committee reviews and recommends investment proposals for further consideration and action. Specifically it is required to:

• ReviewscreeningsheetsandshortlistsforformalapprovalbytheRMCD.

• ReviewinvestmentapplicationspriortofinalapprovalbytheBoardIC.

• Reviewandapproveprivateplacementmemoranda(PPMs).

• Approvethecommencementofformalsellingofinvestments(basedontheapprovedPPM).

• Reviewandapproveorrecommendproposalsforsaleof/exitfrominvestments.

• Reviewthestatusofcurrentprojects.

• Monitortheinvestmentprocess.

Credit Risk Committee

The CRC:

• Reviewscreditproposalsagainstrelevantpolicies.

• (As applicable) approves proposalswithin its authority limit or recommends to the relevant approvingauthorities proposals above its authority limit.

Asset and Liability Committee

ALCO’s principal responsibilities are to:

• Proposethenecessarypoliciesandprocedurestomanageliquidityandmarketrisk.

• Reviewandmonitorthebalancesheet(andoff-balancesheetpositions)oftheBank(includingtheimpact

Corporate Governance (continued)


of its subsidiaries) such that the Board’s liquidity and market risk policies are implemented.

• Ensurethatlinesofauthorityandaccountabilitywithintheliquidityandmarketriskmanagementprocessareclearlydelineated.

• OverseecontrolstomanagetheBank’smarketrisk.

• ProposestrategiestotheBoardinrespectofproprietaryinvestmentsandtheuseofderivatives.

• Ensurethatonaday-to-daybasistheBankcomplieswithapplicablelawsandregulations.

Nomination, Remuneration and Governance Committee

The NRCG’s role and responsibilities are to:

• RecommendthenominationofBoardmembersandexecutivemanagement.

• RecommendcompensationandremunerationforBoardmembers,theCEOandseniormanagement.

• FollowupBoardresolutionsandrecommendations.

• MonitorimplementationoftheBank’ssuccessionplan.

• Reviewmanagementadministrativedecisionsrelatedtoterminationandremunerationentitlementsinordertoavoidrewardingpoorperformance in the event of early contract termination.

Other disclosures

Communication with stakeholders

The Bank communicates with its customers and stakeholders in a timely manner through various channels. Information on developments, financial results, new products or any updates of existing products are placed on the Bank’s website www.1stenergybank.com and/or published in the media. Product details are also disseminated to customers and other interested parties through prospectuses, brochures and/or periodic investment updates.

Executive compensation

The Bank is currently developing both a short-term and long-term compensation structure for its executive management based on current market surveys and industry norms. Board members are entitled to attendance fees and their annual remuneration is subject to the approval of the shareholders at the end of each financial year.


Financial Statements


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

The Sharia’a Supervisory Board (“SSB”) has reviewed the principles and contracts relating to the transactions conducted by First Energy Bank (the “Bank”) during the course of the year ending December 31, 2009. Their review was conducted in order to judge whether the Bank followed the principles of the Islamic Sharia’a, specific fatwas, and guidelines issued by the SSB. The Bank’s management is responsible for ensuring that its operations are carried out in compliance with SSB rulings.

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

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

In our opinion:

• TheBank’scontracts,transactionsanddealsfortheyearendingDecember31,2009areincompliance with the rules and principles of the Islamic Sharia’a.

• TheBank’sallocationofprofitandchargingoflossesrelatingtoinvestmentaccountsareincompliance with the rules and principles of the Islamic Sharia’a.

• Earningsthathavebeenrealizedfromsourcesthatarenon-Sharia’acompliantweredonatedtocharity.

• TheBank’scalculationofZakatisincompliancewiththerulesandprinciplesoftheIslamicSharia’a.

We beseech the Almighty to grant us excellence and success.

Wassalam Alaikum Wa Rahmat Allah Wa Barakatuh.

Sheikh Nizam Mohammed Saleh Yaqubi

Chairman - Sharia’a Supervisory Board

Sheikh Dr. Mohamed Ali bin Ibrahim Elgari Sheikh Dr. Mohamad Akram Laldin

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

Sharia’a Supervisory Board Report


Report on the consolidated financial statements

We have audited the accompanying consolidated financial statements of First Energy Bank BSC (c) (“the Bank”) and its subsidiaries (together the “Group”), which comprise the consolidated statement of financial position as at 31 December 2009, and the consolidated statements of income, comprehensive income, changes in equity and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory notes.

Responsibilities of the Board of Directors for the consolidated financial statements

The Board of Directors of the Bank is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Financial Accounting Standards issued by the Accounting and Auditing Organisation for Islamic Financial Institutions and International Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of the consolidated financial statements that are free from material misstatements, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. The Board of Directors is also responsible for the Group’s undertaking to operate in accordance with Islamic Sharia’a rules and principles.

Auditors’ responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with both the Auditing Standards for Islamic Financial Institutions and International Standards on Auditing. Those standards require that we comply with relevant ethical requirements and plan and perform the audit to obtain reasonable assurance whether the consolidated financial statements are free of material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgement, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting principles used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

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

Opinion

In our opinion, the consolidated financial statements give a true and fair view of the financial position of the Group as at 31 December 2009 and of the results of its operations, changes in equity and cash flows for the year then ended in accordance with Financial Accounting Standards issued by the Accounting and Auditing Organisation for Islamic Financial Institutions and the Sharia’a rules and principles as determined by the Sharia’a Supervisory Board of the Bank.

In addition, in our opinion, the consolidated financial statements give a true and fair view of the financial position of the Group as at 31 December 2009 and of its financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards.

Report on other legal and regulatory requirements

In our opinion, the Bank has maintained proper accounting records and the consolidated financial statements are in agreement therewith. We have reviewed the accompanying report of the chairman and confirm that the information contained therein is consistent with the consolidated financial statements. We are not aware of any violations of the Bahrain Commercial Companies Law 2001, the Central Bank of Bahrain and Financial Institutions Law 2006, the terms of the Bank’s license or its memorandum and articles of association having occurred during the year ended 31 December 2009 that might have had a material effect on the business of the Bank or on its financial position. Satisfactory explanations and information have been provided to us by the management in response to all our requests.

Independent Auditors’ Report to the Shareholders

FIRST ENERGY BANK B.S.C. (c)

Manama, Kingdom of Bahrain 11 February 2010

KPMG


CONSOLIDATED STATEMENT OF FINANCIAL POSITION as at 31 December 2009 US$ 000’s

The accompanying notes 1 to 33 form an integral part of these consolidated financial statements. The accompanying notes 1 to 33 form an integral part of these consolidated financial statements.

Note 31 December 2009 31 December 2008

ASSETS

Cash and bank balances 4 12,358 2,225

Placements with financial institutions 5 685,880 970,665

Financing receivables 6 138,544 -

Investment securities 7 236,973 -

Investment in associates 8 96,787 -

Other assets 9 42,333 45,285

Property and equipment 10 21,044 3,016

Total assets 1,233,919 1,021,191

LIABILITIES AND EQUITY

Liabilities

Placements from financial institutions 11 171,464 -

Other liabilities 12 7,778 21,149

Total liabilities 179,242 21,149

Equity

Share capital 13 1,000,000 1,000,000

Statutory reserve 1,437 4

Investments fair value reserve 148 -

Foreign exchange translation reserve 2,478

Retained earnings 12,940 38

Total equity attributable to shareholders of the Bank 1,017,003 1,000,042

Non-controlling interest 37,674 -

Total equity (page 43) 1,054,677 1,000,042

Total liabilities and equity 1,233,919 1,021,191

The consolidated financial statements, which consist of pages 40 to 80, were approved by the Board of Directors on 11 February 2010 and signed on its behalf by:

Esam Yousif Janahi Khalid Mohamed Najibi Vahan Zanoyan

Chairman Director Chief Executive Officer


CONSOLIDATED INCOME STATEMENTfor the year ended 31 December 2009 US$ 000’s


Note

12 months ended

31 December 2009

23 June 2008 to

31 December 2008

Income from investment banking services 14,402 -

Income from placements with financial institutions 17,865 17,025

Income from financing 453 -

Income from investment securities 14 4,551 -

Income from investment in associates 8 10,139 -

Total income 47,410 17,025

Staff cost 15 13,158 2,056

Finance expense 295 -

Investment banking related expenses 2,776 3,015

Impairment allowance on property 10 8,734 -

Other operating expenses 16 8,247 2,926

Pre-operating expenses 17 - 8,986

Total expenses 33,210 16,983

PROFIT FOR THE YEAR 14,200 42

Attributable to:

Shareholders of the Bank 14,335 42

Non-controlling interest (135) -

14,200 42

The consolidated financial statements, which consist of pages 40 to 80, were approved by the Board of Directors on 11 February 2010 and signed on its behalf by:

Esam Yousif Janahi Khalid Mohamed Najibi Vahan Zanoyan

Chairman Director Chief Executive Officer


Note

12 months ended

31 December 2009

23 June 2008 to

31 December 2008

Profit for the year 14,200 42

Other comprehensive income

Net changes in fair value of

available-for-sale investments 7 148 -

Exchange differences arising on translation of

investment in an associate 8 2,478 -

Total comprehensive income for the year 16,826 42

Attributable to:

Shareholders of the parent 16,961 42

Non-controlling interest (135) -

16,826 42

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOMEfor the year ended 31 December 2009 US$ 000’s



Attributable to shareholders of the Bank

Non-controlling

interest Total equity12 months ended 31 December 2009 Share

CapitalStatutory

reserve

Invest-ments

fair value reserve

Foreign exchange

translation reserve

Retained earnings Total

Balance at 1 January 2009 1,000,000 4 - - 38 1,000,042 - 1,000,042

Total comprehensive income

Profit for the year - - - - 14,335 14,335 (135) 14,200

Other comprehensive income

Exchange differences arising on translation of investment in an associate - - 2,478 - 2,478 - 2,478

Net changes in fair value of available-for-sale investments - - 148 - - 148 - 148

Total other comprehensive income - - 148 2,478 - 2,626 - 2,626

Total comprehensive income - - 148 2,478 14,335 16,961 (135) 16,826

Transfer to statutory reserve - 1,433 - - (1,433) - - -

Contribution from non-controlling interest - - - - - - 37,809 37,809

Balance at 31 December 2009 1,000,000 1,437 148 2,478 12,940 1,017,003 37,674 1,054,677

Attributable to shareholders of the Bank

Non-controlling

interest Total equity23 June 2008 to 31 December 2008Share

CapitalShare

premiumStatutory

reserve

Invest-ments

fair value reserve

Retained earnings Total

Total comprehensive income

Profit for the period - - - - 42 42 - 42

Other comprehensive income - - - - - - - -

Total comprehensive income - - - - 42 42 - 42

Share capital introduced 1,000,000 9,100 - - - 1,009,100 - 1,009,100

Share issue expenses (note 17) - (9,100) - - - (9,100) - (9,100)

Transfer to statutory reserve - - 4 - (4) - - -

Balance at 31 December 2008 1,000,000 - 4 - 38 1,000,042 - 1,000,042

CONSOLIDATED STATEMENT OF CHANGES IN EQUITYfor the year ended 31 December 2009 US$ 000’s



12 months ended

31 December 2009

23 June 2008 to

31 December 2008

OPERATING ACTIVITIES

Receipt of income from investment banking services 22,532 -

Receipt of income from placements with financial institutions 21,340 13,550

Placements with financial institutions, net (119,889) -

Placements from financial institutions, net 171,464 -

Financing (141,048) -

Payment for expenses and project costs (33,197) (43,090)

Cash flows from operating activities (78,798) (29,540)

INVESTING ACTIVITIES

Purchase of property and equipment (27,530) (3,024)

Purchase of software (1,079) -

Advance paid for acquisition of an investment - (3,646)

Investments in associates (92,300) -

Acquisition of investment securities (268,476) -

Sale of investment securities 34,526 -

Income from investment securities received 1,307 -

Cash flows from investing activities (353,552) (6,670)

FINANCING ACTIVITIES

Proceeds from issue of ordinary shares - 1,009,100

Contribution from non-controlling interest 37,809 -

Cash flows from financing activities 37,809 1,009,100

Net (decrease) / increase in cash and cash equivalents (394,541) 972,890

Cash and cash equivalents at the beginning of the period 972,890 -

Cash and cash equivalents at 31 December 578,349 972,890

Cash and cash equivalents comprise:

Cash and bank balances 12,358 2,225

Placements with financial institutions (note 5) 565,991 970,665

578,349 972,890

CONSOLIDATED STATEMENT OF CASH FLOWSfor the year ended 31 December 2009 US$ 000’s



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 2009 US$ 000’s


1. INCORPORATION AND PRINCIPAL ACTIVITY

First Energy Bank BSC (c) (the ‘Bank‘) was incorporated on 23 June 2008 in the Kingdom of Bahrain under Commercial Registration

No. 69089. The Bank operates as an Islamic Wholesale Bank under a license granted by the Central Bank of Bahrain (‘CBB’).

The Bank’s activities are regulated by the CBB and supervised by a Sharia’a Supervisory Board for compliance with Sharia’a

rules and principles. The principal activities of the Bank include investment banking services in accordance with Islamic Sharia’a

principles and participation in project development, joint ventures, mergers and acquisitions and the purchase of assets and asset

portfolios related to the energy sector.

Consolidated financial statements

The consolidated financial statements of the Bank as at and for the year ended 31 December 2009 comprise the financial

statements of the Bank and its subsidiaries (together referred to as the “Group” and individually as “Group entities”). The significant

subsidiaries of the Bank include:

Subsidiary% holding /

beneficial interestPrincipal activities

Cosmos Industrial Investment Corporation

BSC (c), Bahrain93%

Holding company for investment in a project for

development and operation of a polycrystalline

silicon plant in the Kingdom of Saudi Arabia

Al Dur Energy Investment Company, Cayman

Islands59% To hold 15% indirect interest in a power and

water plant project in the Kingdom of Bahrain

North Africa Investment Company, Cayman

Islands100% To hold the Group’s 40% associate stake in Arab

Drilling and Workover Company, Libya

2. SIGNIFICANT ACCOUNTING POLICIES

The significant accounting polices applied in the preparation of these consolidated financial statements are set out below. These

accounting policies have been applied consistently to all periods presented in the consolidated financial statements, and have been

consistently applied by Group entities, except for the changes resulting from amendments made to accounting standards (refer

note 2(c)).

(a) Statement of compliance

The consolidated financial statements have been prepared in accordance with both the Financial Accounting Standards (‘FAS’)

issued by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) and International Financial Reporting

Standards (‘IFRS/ IAS’), and in accordance with the requirements of Bahrain Commercial Companies Law 2001.


2 SIGNIFICANT ACCOUNTING POLICIES (continued)

(b) Basis of preparation

The consolidated financial statements are presented in US Dollars, being the principal currency of the Group’s operations and

are prepared on the historical cost basis except for the measurement at fair value of derivative financial instruments and certain

available-for-sale investments. Except as otherwise indicated, financial information presented in US Dollars has been rounded to

the nearest thousand.

The preparation of financial statements requires the use of certain critical accounting estimates. It also requires management to

exercise judgement in the process of applying the Group’s accounting policies. Estimates and underlying assumptions are reviewed

on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any

future periods affected. Management believes that the underlying assumptions are appropriate and the Group’s financial statements

therefore present the financial position and results fairly. The areas involving a higher degree of judgement or complexity, or areas

where assumptions and estimates are significant to the consolidated financial statements are disclosed in note 3.

(c) Standards, amendments and interpretations effective on or after 1 January 2009

The following standards, amendments and interpretations, which became effective in 2009 are relevant to the Group:

IAS 1 (revised), ‘Presentation of financial statements’

During the year, the Group adopted Revised IAS 1 “Presentation of Financial Statements” on its required application date of 1

January 2009. Revised IAS 1 introduces the term “total comprehensive income”, which represents changes in equity during a period

other than those changes resulting from transactions with owners in their capacity as owners. Total comprehensive income may be

presented in either 1) a single statement of comprehensive income (effectively combining both the income statement and all non-

owner changes in equity in a single statement), or 2) in an income statement and a separate statement of comprehensive income.

The Group has opted to present separate statements – an income statement and a separate statement of comprehensive income.

Accordingly, a new primary statement of comprehensive income has been included in the consolidated financial statements along

with the required comparative information.

Amendments to IFRS 7, ‘Financial instruments: Disclosures’

The amendment to IFRS 7 requires enhanced disclosures about fair value measurements and liquidity risk. In particular, the

amendment requires disclosure of fair value measurements by level of a fair value measurement hierarchy. The adoption of the

amendment results in additional disclosures but does not have an impact on the financial position or the comprehensive income

of the Group. These additional disclosures have been presented for the current financial reporting period and in line with the

transitional provisions, comparative information has not been provided (refer note 29).

IFRS 8, ‘Operating segments’

IFRS 8 “Operating Segments” is applicable for periods beginning on or after 1 January 2009. This standard introduces the

“management approach” to segment reporting which requires a change in the presentation and disclosure of segment information

based on the internal reports that are regularly reviewed by the Bank’s “chief operating decision maker” in order to assess each

segment’s performance and to allocate resources to them. The Group currently primarily operates as a single investment banking

unit and its revenue, expenses and results are reviewed only at a Group level and therefore no separate operating segment results

and other disclosures are provided in these consolidated financial statements.




Improvements to IFRS (May 2008)

‘Improvements to IFRS’ issued in May 2008 contained numerous amendments to IFRS that the IASB considers non-urgent but

necessary. ‘Improvements to IFRS’ comprise amendments that result in accounting changes for presentation, recognition or

measurement purposes, as well as terminology or editorial amendments related to a variety of individual IFRS standards. The

amendments effective for annual periods beginning on or after 1 January 2009 have been considered by the Group and there have

been no material changes to accounting policies as a result of these amendments.

(d) Basis of consolidation

(i) Subsidiaries

Subsidiaries are those enterprises (including special purpose entities) controlled by the Group. Control exists when the Group

has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its

activities. Subsidiaries are consolidated from the date on which control is transferred to the Group and de-consolidated from

the date that control ceases. Subsidiaries are fully consolidated from the date on which control is transferred to the Group.

They are de-consolidated from the date on which control ceases. Interests in the equity of subsidiaries not attributable to the

parent are reported in consolidated equity as non-controlling interest. Profits or losses and changes in other comprehensive

income attributable to non-controlling interest are reported separately in the consolidated income statement and statement

of comprehensive income.

Special purpose entities (SPEs) are entities that are created to accomplish a narrow and well-defined objective such as the

securitisation of particular assets, or the execution of a specific borrowing or investment transaction. An SPE is consolidated

if, based on an evaluation of the substance of its relationship with the Group and the SPE’s risks and rewards, the Group

concludes that it controls the SPE. The assessment of whether the Group has control over an SPE is carried out at inception

and normally no further reassessment of control is carried out in the absence of changes in the structure or terms of the SPE,

or additional transactions between the Group and the SPE. Where the Group’s voluntary actions, such as lending amounts in

excess of existing liquidity facilities or extending terms beyond those established originally, change the relationship between

the Group and an SPE, the Group performs a reassessment of control over the SPE.

Accounting for acquisition of subsidiaries is governed under IFRS 3 ‘Business combinations’. Accounting for business

combinations under IFRS 3 only applies if it is considered that a business has been acquired. For acquisitions meeting the

definition of a business, the acquisition method of accounting is used. The excess of the cost of acquisition over the fair

value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. Any goodwill arising from initial

consolidation is tested for impairment at least once a year and whenever events or changes in circumstances indicate the

need for an impairment. If the cost of acquisition is less than the fair value of the Group’s share of the net assets acquired,

the difference is recognised directly in the consolidated income statement. For acquisitions not meeting the definition of a

business, the Group allocates the cost between the individual identifiable assets and liabilities. Financial assets and liabilities

are recognised at their fair value at the acquisition date as measured in accordance with IAS 39 ‘Financial instruments:

Recognition and measurement’ and the remaining balance of the cost of purchasing the assets and liabilities is allocated to

other individual non-financial assets and liabilities based on their relative fair values at the acquisition date.

(ii) Associates

Associates are all entities over which the Group has significant influence but not control, generally accompanying a shareholding

of between 20% and 50% of the voting rights.





Investments in associates are initially recognised at cost. The excess of the cost of acquisition over the fair value of the

Group’s share of the identifiable net assets acquired is recorded as goodwill. Goodwill on acquisition of an associate is not

recognised separately and is included in the carrying value of the investment in associate. If the cost of acquisition is less than

the fair value of the Group’s share of the net assets acquired, the difference is recognised directly in the consolidated income

statement.

After initial recognition, the carrying amount is increased or decreased to recognise the investor’s share of the profit or loss

of the investee after the date of acquisition. Distributions received from an investee reduce the carrying amount of the

investment. Adjustments to the carrying amount may also be necessary for change in the investor’s proportionate interest

in the investee arising from changes in the investee’s other comprehensive income. If the Group’s share of losses exceeds its

interest in an associate, the Group’s carrying amount is reduced to nil and recognition of further losses is discontinued except

to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the associate.

(iii) Transactions eliminated on consolidation

Intra-group balances and transactions, and any unrealised gains arising from intra-group transactions with subsidiaries are

eliminated in preparing the consolidated financial statements. Intra-group gains on transactions between the Group and its

equity accounted associates are eliminated to the extent of the Group’s interest in the investees. Unrealised losses are also

eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. Accounting

policies of the subsidiaries and associates that are equity accounted have been changed where necessary to ensure consistency

with the policies adopted by the Group.

(e) Foreign currency transactions

(i) Functional and presentation currency

Items included in the consolidated financial statements are measured using the currency of the primary economic environment

in which the entity operates (the functional currency). The consolidated financial statements are presented in US dollars,

which is the Bank’s functional and presentation currency. Other than the functional currency of an associate (which is

determined to be Libyan dinars), the other Group companies functional currencies are either denominated in US dollars or

currencies which are effectively pegged to the US dollars.

(ii) Transactions and balances

Foreign currency transactions are translated into the respective functional currencies of each operation using the exchange

rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such

transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign

currencies are recognised in the income statement. Translation differences on non-monetary items carried at their fair value, such as certain available-for-sale equity securities, are included in investments fair value reserve.

(iii) Group entities

The assets and liabilities of foreign operations, whose functional currency is different that the Bank’s presentation currency,

are translated into US dollars at spot exchange rates at the reporting date. The income and expenses of foreign operations

are translated into US dollars using the average of the spot exchange rates during the period of the transactions. Foreign




currency differences on the translation of foreign operations are recognised in other comprehensive income. Such differences

have been recognised under a foreign exchange translation reserve in equity. If the operation is an associate, the Group

recognises translation reserve to the extent of its proportionate share in the investee. When a foreign operation is disposed

of, the relevant amount in the foreign exchange translation reserve is reclassified to income statement as part of the profit

or loss on disposal.

In case of Group entities whose functional currencies are effectively pegged to the US dollars, the translation of financial

statements of the group entities that have a functional currency different from the presentation currency do not result in

exchange differences.

(f) Financial assets and liabilities

Financial assets of the Group comprise bank balances, placements with financial institutions, financing receivables, investment

securities, risk management instruments and other receivable balances. Financial liabilities of the Group comprise placements from

financial institutions and other payable balances.

(i) Recognition and de-recognition

All financial assets (except investment securities and derivatives) and liabilities are recognised on the date at which they are

originated. Investment securities and derivatives are recognised at the trade date i.e. the date that the Group contracts to

purchase or sell the asset, at which date the Group becomes party to the contractual provisions of the instrument.

A financial asset or liability is initially measured at fair value which is the value of the consideration given (in the case of an

asset) or received (in the case of a liability).

The Group derecognises a financial asset when the rights to receive cash flows from the financial assets have expired or where

the Group has transferred substantially all risk and rewards of ownership. The Group writes off certain financial assets when

they are determined uncollectible. The Group derecognises a financial liability when its contractual obligations are discharged,

cancelled or expire.

Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and

only when, the Group has a legal right to set off the recognised amounts and it intends either to settle on a net basis or to

realise the asset and settle the liability simultaneously. Finance income and expenses are presented on a net basis only when

permitted under IFRSs, or for gains and losses arising from a group of similar transactions.

(ii) Classification of financial assets and liabilities

The Group allocates financial assets to the following IAS 39 categories: financial assets at fair value through profit or loss;

loans and receivables; held-to-maturity investments; and available-for-sale financial assets. Except for investment securities

(refer note 2 (j)) and derivative financial instruments (refer note 2 (k)), the Group classifies all other financial assets as loans

and receivables. All of the financial liabilities of the Group are classified at amortised cost. Management determines the

classification of its financial instruments at initial recognition.

(iii) Measurement principles

Financial assets and liabilities are measured either at fair value, amortised cost or in certain cases carried at cost.





Fair value measurement

Fair 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.

When available, the Bank measures the fair value of an instrument using quoted prices in an active market for that instrument.

A market is regarded as active if quoted prices are readily and regularly available and represent actual and regularly occurring

market transactions on an arm’s length basis. If a market for a financial instrument is not active, the Bank uses valuation

techniques to establish a reliable measure of fair value.

Amortised cost measurement

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

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

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

calculation of the effective profit rate includes all fees and points paid or received that are an integral part of the effective

profit rate.

(g) Cash and cash equivalents

For the purpose of statement of cash flows, cash and cash equivalents comprise cash and balances with banks and short-term

highly liquid assets (placements) with maturities of three months or less when acquired which are subject to insignificant risk of

changes in fair value and are used by the Group in the management of its short-term commitments and liquidity.

(h) Placements with and from financial institutions

These comprise placements made or received in the form of wakala contracts or international commodity murabaha contracts.

Placements with and from financial institutions are carried at their amortised cost.

(i) Financing receivables

Financing receivables comprise Sharia’a compliant financing provided by the Group and are carried at amortised cost less

impairment allowances, if any.

(j) Investment securities

The Group classifies its investment securities, excluding investment in subsidiaries and equity accounted associates (refer note 2

(d)), in the following categories: investment at fair value through profits or loss; held-to-maturity investments; and available-for-

sale investments.

(i) Classification

Investments carried at fair value through profit or loss are financial assets that are held for trading or which upon initial

recognition are designated by the Group as at fair value through profit or loss.

An investment is classified as held for trading if it is acquired principally for the purpose of selling or repurchasing it in the




near term or part of a portfolio of identified financial instruments that are managed together and for which there is evidence

of a recent actual pattern of short-term profit-taking. The Group currently does not hold trading investments.

The Group designates investment securities as at fair value through profit or loss at inception only when it is managed,

evaluated and reported on internally on a fair value basis. Currently, the Group has not designated any of its investment

securities at fair value through profit or loss

Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity

that the Group has the positive intention and ability to hold to maturity, and which are not designated as carried at fair value

through profit or loss or as available-for-sale. The Group’s current held-to-maturity investments comprise of investment in

Sukuk.

Available-for-sale investments are non-derivative financial assets that are not investments carried at fair value through profit

or loss or held-to-maturity or loans and receivables. These include investments in Sukuk and unquoted equity securities.

(ii) Initial recognition

Investment securities are initially recognised at fair value, plus transaction costs for all financial assets not carried at fair value

through profit or loss. Transaction costs on investments carried at fair value through profit or loss are expensed in profit or

loss when incurred.

(iii) Subsequent measurement

Subsequent to initial recognition, investments carried at fair value through profit or loss and available-for-sale investments are

re-measured to fair value. Gains and losses arising from a change in the fair value of investments carried at fair value through

profit or loss are recognised in the income statement in the period in which they arise. Gains and losses arising from a change

in the fair value of available-for-sale investments are recognised in the consolidated statement of comprehensive income and

presented in a separate fair value reserve within equity. When the available-for-sale investments are sold, impaired, collected

or otherwise disposed of, the cumulative gain or loss previously recognised in the statement of comprehensive income is

transferred to the income statement.

Available-for-sale investments which do not have a quoted market price or other appropriate methods from which to derive

reliable fair values are stated at cost less impairment allowances.

Held-to-maturity investments are measured at amortised cost less any impairment allowances.

(iv) Reclassification

The Group may choose to reclassify a non-derivative financial asset if permitted by IFRSs. A financial asset classified as

available-for-sale that would have met the definition of held-to-maturity (if it had not been designated as available-for-sale

at inception) may be reclassified out of the available-for-sale category to the held-to-maturity investments category when

the Group has the intention and ability to hold the financial asset for the foreseeable future or until maturity.

Reclassifications are made at fair value as of the reclassification date. For a financial asset reclassified out of the available-

for-sale category, any previous gain or loss on that asset that has been recognised in equity is amortised to profit or loss

over the remaining life of the investment using the effective profit rate. Any difference between the new amortised cost and

the expected cash flows is also amortised over the remaining life of the asset using the effective profit rate. If the asset is

subsequently determined to be impaired then the amount recorded in equity is reclassified to the income statement.





(v) Fair value measurement principles

Fair value for quoted investments is their market bid price. For other unquoted investments, fair value is determined either by

reference to the price of the most recent transactions in the securities, or based on recognised internal valuation models.

(k) Risk management instruments and hedge accounting

The Group currently only enters into Sharia’a compliant risk management instruments to cover its exposure to profit rate risks.

These derivative-type risk management instruments are initially recognised at fair value on the date on which a contract is entered

into and are subsequently re-measured at their fair value. The fair value of an instrument is the equivalent of the unrealised gain

or loss from marking to market the instrument using prevailing market rates. Instruments with positive market values (unrealised

gains) are disclosed under other assets and instruments with negative market values (unrealised losses) are disclosed under other

liabilities in the statement of financial position.

Changes in the fair value of these financial instruments that are designated, and qualify as fair value hedges, are included in the

income statement together with the corresponding change in the fair value of the hedged asset or liability that is attributable to

the risk being hedged. Unrealised gains or losses on hedged assets which are attributable to the hedged risk are adjusted against the

carrying values of the hedged assets or liabilities. For risk management instruments that are not designated in a qualifying hedge

relationship, all changes in its fair value are recognised immediately in the income statement.

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

fair value hedge accounting, or the hedge designation is revoked, hedge accounting is discontinued prospectively. Any adjustment

up to that point to a hedged item for which the effective profit method is used, is amortised to profit or loss as part of the

recalculated effective profit rate of the item over its remaining life.

Embedded derivatives

Certain derivatives embedded in other financial instruments, such as the conversion option in a debt instrument, are treated as

separate derivatives when their economic characteristics and risks are not closely related to those of the host contract and the host

contract is not carried at fair value through profit or loss. These embedded derivatives are separately accounted for at fair value,

with changes in fair value recognised in the consolidated income statement unless the Group chooses to designate the hybrid

contracts at fair value through profit or loss. The Group uses internal models to measure the fair value of embedded derivatives.

These models use techniques generally recognised as standard within the industry. Some of the inputs to these models may not

be market observable and are therefore estimated based on assumptions.

(l) Property and equipment

Property and equipment is stated at cost, net of accumulated depreciation and impairment, if any. Land is not depreciated.

Depreciation on equipment is computed using the straight-line method to write off the cost of the assets over their estimated

useful lives of three years. The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance

sheet date.

(m) Impairment of financial assets

The Bank assesses at each balance sheet date whether there is objective evidence that an asset is impaired. Objective evidence




that financial assets are impaired can include default or delinquency by a borrower, restructuring of a financing or advance by

the Group on terms that the Group would not otherwise consider, indications that a borrower or issuer will enter bankruptcy, the

disappearance of an active market for a security, or other observable data relating to 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.

Impairment losses are recognised in the income statement and reflected in an allowance account. Impairment assessment in made

for financial assets that are individually significant, or collectively for financial assets that are not individually significant and with

similar credit risk characteristics.

Financial assets carried at amortised cost

For financial assets carried at amortised cost (financing receivables and held-to-maturity investments), impairment is measured

as the difference between the carrying amount 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 allowance account.

When a subsequent event causes the amount of impairment loss to decrease, the impairment loss is reversed through the income

statement.

Available-for-sale investments

In the case of debt instruments classified as available-for-sale, impairment is assessed based on the same criteria as financial

assets carried at amortised cost. However, the amount recorded for impairment is the cumulative loss measured as the difference

between the amortised cost and the current fair value, less any impairment loss on that investment previously recognised in the

income statement. If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the

increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment

loss is reversed through the consolidated income statement.

In case of available-for-sale equity securities carried at fair value, a significant or prolonged decline in the fair value of the security

below its cost is objective evidence of impairment resulting in recognition of an impairment loss. In case of equity securities

quoted in active markets, the Group considers a decline in value of 20% below cost or a decline in value that persists for more

than 6 months as an indicator of impairment. If any such evidence exists for available-for-sale investments, the cumulative loss

– measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial

asset previously recognised in profit or loss – is removed from equity and recognised in the income statement. Impairment losses

recognised in the income statement are not subsequently reversed through the income statement.

For available-for-sale investments carried at cost, the Group makes an assessment of whether there is an objective evidence of

impairment for each investment by assessment of financial and other operating and economic indicators. Impairment is recognised

if the estimated recoverable amount is assessed to be below the cost of the investment.

(n) Impairment of non-financial assets

The carrying amount of the Group’s assets or its cash generating unit, other than financial assets and development property, are

reviewed at each reporting date to determine whether there is any indication of impairment. A cash generating unit is the smallest

identifiable asset group that generates cash flows that largely are independent from other asset and groups. If any such indication

exists, the asset’s recoverable amount is estimated. The recoverable amount of an asset or a cash generating unit is the greater

of its value in use or fair value less costs to sell. An impairment loss is recognised whenever the carrying amount of an asset or its

cash generating unit exceeds its estimated recoverable amount.





Impairment losses are recognised in the income statement. Impairment losses are reversed only if there is an indication that the

impairment loss may no longer exist and there has been a change in the estimates used to determine the recoverable amount.

Separately recognised goodwill is not amortised and is tested annually for impairment and carried at cost less accumulated

impairment losses. Impairment losses on goodwill are not reversed.

(o) Dividends and board remuneration

Dividends to shareholders and board remuneration are recognised as liabilities in the period in which they are declared.

(p) Share capital and statutory reserve

Ordinary shares are classified as equity. The Group classifies capital instruments as financial liabilities or equity instruments in

accordance with the substance of the contractual terms of the instruments. Incremental costs directly attributable to the issue of

an equity instrument are deducted from the initial measurement of the equity instruments.

Treasury shares

The amount of consideration paid including all directly attributable costs incurred in connection with the acquisition of the

treasury shares are recognised in equity. Consideration received on sale of treasury shares is presented in the financial statements

as a change in equity. No gain or loss is recognised on the Group’s income statement on the sale of treasury shares.

Statutory reserve

The Bahrain Commercial Companies Law 2001 requires that 10 per cent of the annual profit be appropriated to a statutory reserve

which is normally distributable only on dissolution. Appropriations may cease when the reserve reaches 50 per cent of the paid

up share capital.

(q) Revenue recognition

Income from investment banking services is recognised when the service is provided and income is earned. This is usually when the

Group has performed all significant acts in relation to a transaction and it is highly probable that the economic benefits from the

transaction will flow to the Group. Significant acts in relation to a transaction are determined based on the terms agreed in the

private placement memorandum/ contracts for each transaction.

Finance income from placements with financial institutions, financing receivables and investment in Sukuk is recognised on a time-

apportioned basis using the effective profit method.

Dividend income from available-for-sale investment securities is recognised when the right to receive is established. This is usually

the ex-dividend date for equity securities.

(r) Earnings prohibited by Sharia’a

The Group is committed to avoid recognising any income generated from non-Islamic sources. Accordingly, non-Islamic income (if

any) will be credited to a charity account which is utilised for charitable purposes.




(s) Zakah

The Group is not required to pay Zakah on behalf of its shareholders on its undistributed profits. However, the Bank is required

to calculate and notify, under a separate report, individual shareholders of their pro-rata share of the Zakah payable by them on

distributed profits. These calculations are approved by the Bank’s Sharia’a Supervisory Board.

(t) Employee benefits

(i) Short-term benefits

Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is

provided. A provision is recognised for the amount expected to be paid under short-term cash bonus or profit-sharing plans if

the Bank has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee

and the obligation can be estimated reliably.

(ii) Post employment benefits

Pensions and other social benefits for Bahraini employees are covered by the General Organisation for Social Insurance

scheme, which is a ‘defined contribution scheme’ in nature under IAS 19 ‘Employee Benefits’, and to which employees and

employers contribute monthly on a fixed-percentage-of-salaries basis. Contributions by the Bank are recognised as an expense

in income statement when they are due.

Expatriate employees on fixed contracts are entitled to leaving indemnities payable under the Bahraini Labour Law for the

Private Sector of 1976, based on length of service and final remuneration. Provision for this unfunded commitment, which is

a ‘defined benefit scheme’ in nature under IAS 19, has been made by calculating the notional liability had all employees left

at the balance sheet date. These benefits are in the nature of a ‘defined benefit scheme’ and any increase 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 employee contribute monthly

on a fixed percentage of salaries basis. The scheme is in the nature of a defined contribution scheme and contributions by the

Bank are recognised as an expense in the income statement when they are due.

(u) Provisions

A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be

estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation.

(v) Segment reporting

A segment is a distinguishable component of the Bank that is engaged either in providing products or services (business segment)

or in providing products or services within a particular environment (geographical segment), which is subject to risks and rewards

that are different from those of other segment. The Group currently primarily operates as a single investment banking unit and its

revenue, expenses and results are reviewed only at a Group level and therefore no separate operating segment results and other

disclosures are provided in these consolidated financial statements.




3. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES

The Group makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial

year. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including

expectation of future events that are believed to be reasonable under the circumstances.

Judgements

(i) Classification of investments

In the process of applying the Group’s accounting policies, management decides on acquisition of an investment whether

it should be classified as investments designated at fair value through profit or loss, held-to-maturity or available-for-sale

investment securities. The classification of each investment reflects the management’s intention in relation to each investment

and is subject to different accounting treatments based on such classification [refer note 2 (j)].

(ii) Special purpose entities

The Group sponsors the formation of special purpose entities (SPE’s) primarily for the purpose of allowing clients to hold

investments. The Group provides corporate administration, investment management and advisory services to these SPE’s,

which involve the Group making decisions on behalf of such entities. The Group administers and manages these entities on

behalf of its clients, who are by and large third parties and are the economic beneficiaries of the underlying investments. The

Group does not consolidate SPE’s that it does not have the power to control. In determining whether the Group has the power

to control an SPE, judgements are made about the objectives of the SPE’s activities, its exposure to the risks and rewards,

as well as about the Group intention and ability to make operational decisions for the SPE and whether the Group derives

benefits from such decisions.

(iii) Qualifying hedge relationships

In designating financial instruments in qualifying hedge relationships, the Group has determined that it expects the hedges to

be highly effective over the period of the hedging relationship.

Estimates

(iv) Impairment of financing receivables

Each counterparty exposure is evaluated individually for impairment and is based upon management’s best estimate of

the present value of the cash flows that are expected to be received. In estimating these cash flows, management makes

judgements about counterparty’s financial situation, level of subordination available to the Bank and the net realisable value

of any underlying assets. Each asset is assessed on its merits, and the workout strategy and estimate of cash flows considered

recoverable is reviewed independently by the Risk Management Department. The financing receivables of the Bank have been

originated close to the year end and the Bank’s assessment of the risk of the obligor and associated cash flows is based on

current and recent information.

(v) Impairment of property

The Group acquired land during the year with a view to develop its office building in the near term (note 10). As at 31

December 2009, the recoverable amount of the land was determined based on the higher of the fair value less cost to sell and

its value in use. The value-in-use was determined by an independent firm of external valuers with the recognised and relevant

professional qualification and who have recent experience in the location and category of the property being valued.




The valuation was determined principally considering the future use of the land by using discounted cash flow projections based on estimates of future cash flows, expected costs of construction, levels of occupancy and expected future stream of rental income supported by external evidence such as current market rents for similar properties in the same location and condition, and using discount rates that reflect current market assessments of the uncertainty in the amount and timing of the cash flows. Based on the assessment of value-in-use, an impairment loss of USD 8,734 thousand has been recognised against the carrying value of land acquired (refer note 10). The decline primarily reflects the larger economic environment and market conditions which continued to decline throughout 2009 and the reduction in the frequency of property transactions and instability in the local real estate market.

The potential income effect of approximately 5% change, up or down, in the average rental rates, which is a key variable used in the valuation technique, would increase/ decrease the recoverable amount by USD 2,275 thousand. The potential income effect of 5% change in the construction cost, up or down, which is a key variable used in the valuation technique, would increase/ decrease the recoverable amount by USD 1,666 thousand.

(vi) Impairment on available-for-sale investmentsAvailable-for-sale investments where fair values are not readily available and reliably measurable are carried at cost and the recoverable amount of such investment is estimated to test for impairment. The Group’s available-for-sale equity investments comprise investments in entities that are associated with long-term real estate and infrastructure development projects. In making a judgement of impairment, the Group evaluates among other factors, liquidity of the project, evidence of deterioration in the financial health of the project, impacts of delays in execution, industry and sector performance, changes in technology, and operational and financing cash flows. It is reasonably possible, based on existing knowledge, that the current assessment of impairment could require a material adjustment to the carrying amount of the investments within the next financial year due to significant changes in the assumptions underlying such assessments.

4. CASH AND BANK BALANCES

31 December 2009

31 December 2008

Cash 8 3

Bank balances 12,350 2,222

12,358 2,225

5. PLACEMENTS WITH FINANCIAL INSTITUTIONS

31 December

2009

31 December

2008

Gross commodity murabaha contracts 348,821 140,357

Less: Deferred profits (145) (178)

348,676 140,179

Wakala contracts 337,204 830,486

685,880 970,665




5. PLACEMENTS WITH FINANCIAL INSTITUTIONS (continued)

31 December

2009

31 December

2008

Due within 90 days 565,991 970,665

Due after 90 days 119,889 -

685,880 970,665

6. FINANCING RECEIVABLES

31 December

2009

31 December

2008

Musharaka 15,341 -

Murabaha financing 123,203 -

138,544 -

Murabaha financing include USD 50,744 thousand representing the debt component of a convertible murabaha financing

provided by the Bank to one of its associate companies. The embedded derivative within the convertible murabaha, being the

equity conversion option, has been separated and disclosed under other assets (refer note 9).

7. INVESTMENT SECURITIES

31 December 2009

31 December 2008

Available-for-sale investments 172,664 -

Held-to-maturity investments 64,309 -

236,973 -




a) Available-for-sale investments

31 December 2009

31 December 2008

Investment in quoted sukuk (at fair value) 47,744 -

Investment in unquoted equities (at cost) 124,920 -

172,664 -

During the year, total net fair value decline of USD 227 thousand in quoted available-for-sale investments has been recognised,

of which fair value loss of USD 375 thousand representing changes in the fair value of the hedged item (investment in sukuk)

attributable to the hedged risk (profit rate risk) in a qualifying fair value hedge relationship has been recognised in the income

statement to effectively offset the change in the fair value of the hedging instrument.

Investments in unquoted equity securities are carried at cost less impairment in the absence of a reliable measure of fair value.

Such investments represent investments in early stage infrastructure and development projects for which a reliable estimate of

fair value cannot be determined. The Group intends to realise these investments principally by means of strategic sell outs or at

the time of sale of underlying assets.

b) Held-to-maturity investments

31 December 2009

31 December 2008

At 1 January - -

Reclassification from available-for-sale investments 64,291

Accrued finance income 18 -

64,309 -

Held-to-maturity securities include investment in quoted Sukuk.

Reclassification adjustment

With effect from 21 December 2009, the Group has reclassified certain available-for-sale investment in sukuk to held-to-maturity.

The Group identified financial assets that would have met the definition of held-to-maturity investments (if they had not been

designated as available-for-sale) for which at the date of reclassification it had the intention and ability to hold them until

maturity.

The reclassification was effected as the Group intended to create held-to-maturity portfolio to generate a stable source of returns.

The Group identified a number of available-for-sale investments with the expected characteristics and form and re-classified these

from available-for-sale to held-to-maturity. The reclassifications were made with effect from 21 December 2009 at fair value on

that date.




7. INVESTMENT SECURITIES (continued)

The table below sets out the amounts actually recognised in profit or loss and other comprehensive income in respect of the

financial assets reclassified out of available-for-sale investment securities:

2009 2008

Profit or loss

Other comprehensive

income Profit or loss

Other comprehensive

income

Period before reclassification

Profit 1,842 - - -

Net changes in fair value - 279 - -

Period after reclassification

Profit 79 -

Amount transferred from fair value reserve to profit or loss - 3 - -

Had the above reclassification from available-for-sale to held-to–maturity not been made, other comprehensive income would

have been lower by USD 350 thousand. At 21 December 2009, the effective profit rates on reclassified available-for-sale investment

securities ranged from 0.5 percent to 2.5 percent.

8. INVESTMENT IN ASSOCIATES

31 December 2009

31 December 2008

At 1 January - -

Acquisitions during the year 92,300 -

Elimination for intra-group transactions (8,130) -

Share of profits from associates 10,139 -

Foreign exchange differences 2,478 -

At 31 December 96,787 -

Intra-group gains on transactions between the Group and its equity accounted associates are eliminated to the extent of the

Group’s interest in the investees. During the year, the carrying value of the investment in associate has been adjusted to reflect the




elimination the Group’s share of profits of USD 8,130 thousand arising from a sale transaction with the associate.

Share of profits from associates include USD 6,114 thousand representing excess of the Group’s share of the net identifiable assets

and liabilities over its costs on initial acquisition.

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

by the Group:

2009 2008

Total assets 533,245 -

Total liabilities 269,197 -

Total revenues 121,884 -

Total net profit 19,600 -

9. OTHER ASSETS

31 December 2009

31 December 2008

Project work-in-progress 32,723 37,452

Advance paid for acquisition of an investment 3,646 3,646

Fair value of risk management instruments 369 -

Fair value of equity option embedded in a convertible murabaha (note 6) 2,957 -

Intangible assets – software 1,003 -

Murabaha profits receivable - 3,475

Others 1,635 712

42,333 45,285

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

The Group uses profit rate swap to hedge its exposure to changes in the fair values of certain fixed profit rate sukuk attributable to

changes in market profit rates. The positive fair value of the risk management instruments is disclosed in other assets.




10. PROPERTY AND EQUIPMENT

2009 2008

Equipment ComputersFurniture

and fixture LandWork in

progress2009Total Total

Cost

At 1 January 16 253 - - 2,756 3,025 -

Additions 108 427 56 22,994 3,945 27,530 3,025

Transfer - - 6,701 - (6,701) - -

At 31 December 124 680 6,757 22,994 - 30,555 3,025

Depreciation/ impairment

At 1 January 1 8 - - - 9 -

Impairment allowance (refer note 3 (v)) - - - 8,734 - 8,734 -

Charge for the year 25 180 563 - - 768 9

At 31 December 26 188 563 8,734 - `9,511 9

Net book value as at 31 December 98 492 6,194 14,260 - 21,044 3,016

11. PLACEMENTS FROM FINANCIAL INSTITUTIONS

These comprise placements (murabaha and wakala) accepted as part of the Group’s treasury activities.

12. OTHER LIABILITIES

31 December 2009

31 December 2008

Employee-related accruals 2,129 190

Account payables 725 69

Accrued expenses 1,224 1,296

Advance from investors 3,700 1,300

Pre-incorporation expenses - 18,294

7,778 21,149

Employee related accruals include end of service indemnity provisions of USD 357 thousand (2008: USD 37 thousand).




13. SHARE CAPITAL

31 December 2009

31 December 2008

Authorised:

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

Issued, subscribed and paid-up:

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

14. INCOME FROM INVESTMENT SECURITIES

12 months ended

31 December 2009

23 June 2008to

31 December 2008

Profit earned from investments in sukuk – AFS 2,794 -

Profit earned from investments in sukuk – HTM 79 -

Gain on disposal of available-for-sale investments 1,678 -

4,551 -

15. STAFF COST

12 months ended

31 December 2009

23 June 2008to

31 December 2008

Salaries and benefits 12,258 1,911

Social insurance expenses 413 65

Other staff expenses 487 80

13,158 2,056




16. OTHER OPERATING EXPENSES

12 months ended

31 December

2009

23 June 2008

to

31 December

2008

Rent and utilities 2,149 262

Travelling and related expenses 498 607

Professional and consultancy fee 1,827 -

Advertising and marketing expenses 838 1,386

Board and Sharia’a committee expenses 474 206

Depreciation 768 9

Other expenses 1,693 456

8,247 2,926

17. PRE-OPERATING EXPENSES

12 months ended

31 December

2009

23 June 2008

to

31 December

2008

Professional, legal and consultancy charges - 18,086

Less: Adjusted against share premium - (9,100)

- 8,986

Pre-operating expenses primarily relate to expenses incurred by the founders in relation to the share issue and formation of the

Bank and certain expenses incurred prior to incorporation of the Bank. In 2008, share issue expenses have been adjusted against

share premium to the extent of the available balance and the remaining amounts has been charged to the income statement as

pre-operating expenses. The pre-operating expenses were reimbursed to the founders based on the approval of the shareholders

and the Board of Directors.




18. TOTAL FINANCE INCOME AND FINANCE EXPENSE

12 months ended

31 December

2009

23 June 2008 to

31 December

2008

Placements with financial institutions 17,865 17,025

Financing receivable 453 -

Held-to-maturity investments 79 -

Available-for-sale investments 2,794 -

Total finance income 21,191 17,025

Finance expense on placements from financial institutions (295) -

Net finance income 20,896 17,025

19. RELATED PARTY TRANSACTIONS

Parties are considered to be related if one party has the ability to control the other party or exercise significant influence or joint

control over the other party in making financial and operating decisions. Related parties include major shareholders, Board of

Directors and Executive Management of the Group and entities over which they exercise control and/ or significant influence.

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

2009

Significant shareholders / entities in

which directors are interested

Key management

personnel Associates31 December

2009

Assets

Bank balances 398 - - 398

Placements with financial institutions 283,690 - - 283,690

Financing receivables - - 123,203 123,203

Investment securities 57,828 - - 57,828

Investment in associates - - 96,787 96,787

Other assets 146 3,646 2,957 6,749

Liabilities

Placements from financial institutions 106,070 - - 106,070

Accruals and other liabilities - 175 - 175




19 RELATED PARTY TRANSACTIONS (continued)

Income and expenditure (transactions)

Significant shareholders

/ entities in which directors

are interested

Key management

personnel Associates

12 months ended

31 December 2009

Income

Income from investment banking services 5,750 - 8,570 14,320

Income from placements with financial institutions 14,965 - - 14,965

Income from investment securities 1,582 - - 1,582

Income from investment in associates - - 10,139 10,139

Expenses

Staff cost - 2,921 - 2,921

Finance expenses 230 - - 230

Investment banking related expenses - 433 - 433

Other operating expenses 577 150 - 727

Pre-operating expenses - - - -

2008



Key Management

personnel Associates31 December

2008

Assets

Bank balances 923 - - 923


Other assets 3,475 - - 3,475

Liabilities

Accruals and other liabilities 18,294 - - 18,294






Key Management

personnel Associates

23 June 2008 to31 December

2008

Income

Income from placements with financial institutions 16,226 - - 16,226

Expenses

Staff cost - 328 - 328

Pre-operating expenses 17,250 - - 17,250

Key management personnel of the Bank comprise of the Board of Directors and key members of management having authority

and responsibility for planning, directing and controlling the activities of the Bank. The key management personnel compensation

is as follows:

31 December 2009

23 June 2008 to31 December

2008

Board member fees 320 145

Salary and other short-term benefits 2,782 318

Post employment benefits 139 10

20. ACQUISITION OF SUBSIDIARIES

The Bank set-up/ acquired three subsidiaries (note 1) during the year primarily for the purpose of holding certain investments and

for asset acquisition transactions. Accordingly, the subsidiaries acquired have been initially accounted for as asset acquisitions

rather than as business combinations. The underlying assets and liabilities of these subsidiaries acquired have been consolidated

in these financial statements using their relative fair values on the date of acquisition.

21. ZAKAH

The Bank does not collect or pay Zakah on behalf of its shareholders or investors. Zakah payable by the shareholders is computed

by the Bank on the basis of the method prescribed by the Bank’s Sharia’a Supervisory Board and notified to shareholders annually.

During the previous period no Zakah was payable by the shareholders as the Bank was in operation for a period of six months only.

Zakah payable by the shareholders in respect of each share for the year ended 31 December 2009 is US cents 0.024 for every

share held.

22. EARNINGS PROHIBITED BY SHARIA’A

During the year, there Bank received USD 1.4 thousand (2008: Nil) from non-islamic transactions that are prohibited by Sharia’a

and has credited the income received to an account to be utilised for charitable purposes.




23. SHARIA’A SUPERVISORY BOARD

The Bank’s Sharia’a Supervisory Board consists of three islamic scholars who review the Bank’s compliance with general Sharia’a

principles and specific fatwas, rulings and guidelines issued. Their review includes examination of evidence relating to the

documentation and procedures adopted by the Bank to ensure that its activities are conducted in accordance with Islamic Sharia’a

principles.

24. MATURITY PROFILE

The maturity profile of assets and liabilities based on the remaining periods to contractual maturity dates or expected periods to

realisation/ settlement are as follows:-

2009Up to 3 months

3 to 6 months

6 months to 1 year

1 to 3 years

Over 3 years Total

Assets

Cash and bank balances 12,358 - - - - 12,358

Placements with financial institutions 565,990 21,663 15,094 83,133 - 685,880

Financing receivables 341 - 6,623 85,727 45,853 138,544

Investment securities - - 2,294 64,309 170,370 236,973

Investment in associates - - - 25,122 71,665 96,787

Other assets 3,646 32,723 1,637 3,959 368 42,333

Property and equipment - - - - 21,044 21,044

Total financial assets 582,335 54,386 25,648 262,250 309,300 1,233,919

Liabilities

Placements from financial institutions 171,464 - - - - 171,464

Other liabilities 1,949 5,829 - - - 7,778

Total financial liabilities 173,413 5,829 - - - 179,242

Commitments 80,305 60,945 80,867 46,434 1,533 270,084

Derivatives

Gross inflows 4 9 18 72 72 175

Gross outflows - 176 176 704 704 1,760




2008Up to 3 months

3 to 6 months

6 months to 1 year 1 to 3 years

Over 3 years Total

Assets

Cash and bank balances 2,225 - - - - 2,225

Placements with financial institutions 970,665 - - - - 970,665

Other assets 3,873 3,960 37,452 - - 45,285

Property and equipment - - - - 3,016 3,016

Total assets 976,763 3,960 37,452 - 3,016 1,021,191

Liabilities

Other liabilities 21,149 - - - - 21,149

Total liabilities 21,149 - - - - 21,149

Commitments - 152,753 37,142 140,385 - 330,280

The expected maturities of the financial assets and liabilities are not significantly different from their contractual maturities. The gross

contractual cash outflows for financial liabilities are not significantly different from their carrying values.

25. CONCENTRATION OF ASSETS AND LIABILITIES

a) Industry sector

2009

Banks and

financial

institutions

Energy, power and

infrastructure Others Total

Assets

Cash and bank balances 12,358 - - 12,358


Financing receivables - 123,203 15,341 138,544

Investment securities 82,653 84,920 69,400 236,973

Investments in associates - 96,787 - 96,787

Other assets 369 39,325 2,639 42,333

Property and equipment - - 21,044 21,044

Total assets 781,260 344,235 108,424 1,233,919

Liabilities

Placements from financial institutions 171,464 - - 171,464

Other liabilities 23 - 7,755 7,778

Total liabilities 171,487 - 7,755 179,242




25 CONCENTRATION OF ASSETS AND LIABILITIES (continued)

2008

Banks and

financial

institutions

Energy, power

and

infrastructure Others Total

Assets

Cash and bank balances 2,225 - - 2,225


Other assets 3,475 41,048 762 45,285

Property and equipment - - 3,016 3,016

Total assets 976,365 41,048 3,778 1,021,191

Liabilities

Other liabilities 18,294 - 2,855 21,149

Total liabilities 18,294 - 2,855 21,149

b) Geographic sector

2009 GCC MENA

Europe and

USA Asia Total

Assets

Cash and bank balances 781 - 11,577 - 12,358

Placements with financial institutions 484,994 - 190,886 10,000 685,880

Financing receivables 138,544 - - - 138,544

Investment securities 196,973 20,000 - 20,000 236,973

Investments in associates 41,870 54,917 - - 96,787

Other assets 38,319 - 4,014 - 42,333

Property and equipment 21,044 - - - 21,044

Total assets 922,525 74,917 206,477 30,000 1,233,919

Liabilities

Placements from financial institutions 139,252 32,212 - - 171,464

Other liabilities 7,778 - - - 7,778

Total liabilities 147,030 32,212 - - 179,242




2008 GCC MENA

Europe and

USA Asia Total

Assets

Cash and bank balances 2,225 - - - 2,225

Placements with financial institutions 870,513 - 100,152 - 970,665

Other assets 41,689 - 3,596 - 45,285

Property and equipment 3,016 - - - 3,016

Total assets 917,443 - 103,748 - 1,021,191

Liabilities

Other liabilities 21,149 - - - 21,149

Total liabilities 21,149 - - - 21,149

26. COMMITMENTS AND CONTINGENCIES

31 December

2009

31 December

2008

Capital commitments in relation to project costs - 327,528

Commitment to finance 204,000 -

Other capital commitments 62,511 2,752

Operating lease commitments 3,573 -

In its normal course of business, the Bank initially undertakes the contractual commitments in relation to project assets and then

places the project with its investors along with the associated contractual commitments. Further, the Group has issued bank

guarantees amounting to USD 11.94 million in relation to performance obligations against its investment in a project through one

of its subsidiaries.

27. SOCIAL RESPONSIBILITY

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

28. PROPOSED APPROPRIATIONS

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

of the shareholders at the annual general meeting.




29. FINANCIAL INSTRUMENTS

a) ACCOUNTING CLASSIFICATION OF FINANCIAL INSTRUMENTS

31 December 2009

Available-

for-sale

Fair value through profit or

lossLoans and

receivables

Other

amortised

cost Total

Assets

Bank balances - - - 12,350 12,350

Placements with financial institutions - - 685,880 - 685,880

Financing receivables - - 138,544 - 138,544

Investment securities 172,664 - 64,309 - 236,973

Other financial assets - 3,326 - 5,281 8,607

Total financial assets 172,664 3,326 888,733 17,631 1,082,354

31 December 2008 - - 972,887 7,833 1,018,175

Liabilities

Placements from financial institutions - - 171,464 171,464

Other financial liabilities - - - 7,778 7,778

Total financial liabilities - - - 179,242 179,242

31 December 2008 - - 21,149 21,149

b) FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value is an amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in

an arm’s length transaction. Other than certain available-for-sale investments in unquoted equity securities of US$ 124,920

thousand (2008: NIL), the estimated fair values of the Group’s financial assets and liabilities are not significantly different from

their book values.

c) FAIR VALUE HIERARCHY

The table below analyses the financial instruments carried at fair value, by valuation method. The different levels have been defined

as follows:

• Level 1: quoted prices (unadjusted) in active markets for identical assets and liabilities

• Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly

(i.e.as prices) or indirectly (i.e. derived from prices)

• Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).




2009 Level 1 Level 2 Level 3 Total

Available-for-sale investments 47,744 - - 47,744

Fair value of equity option on commodity murabaha with associates - - 2,957 2,957

Fair value of risk management instrument - - 369 369

47,744 - 3,326 51,070

The table below shows the reconciliation of movements in value of investments measured using Level 3 inputs:

2009

Balance at 1 January -

Total gains or losses:

- In profit or loss 369

- In other comprehensive income -

Purchases 2,957

Settlements -

Transfers into/ out of Level 3 -

Balance at 31 December 3,326

30. FINANCIAL RISK MANAGEMENT

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

• credit risk;

• liquidity risk;

• market risks; and

• operational risk

The Bank has a risk management framework in place for managing these risks which is constantly evolving as the business activities

change in response to credit, market, product and other developments.

This note presents information about the Group’s exposure to each of the above risks, its objectives, policies and processes for

measuring and managing risk, and the Bank’s management of capital.

Risk management framework

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




30 FINANCIAL RISK MANAGEMENT (continued)

The Bank’s risk management policies are established to identify and analyse the risks faced by the Bank, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed to reflect changes in market conditions, products and services offered.

Risk Management Committee is responsible for recommending policy and framework to the Board Risk Committee, which in turn is responsible for reviewing and recommending to the Board for approval. The Risk Management Department is responsible for monitoring compliance with the Bank’s risk management policies and procedures, and for reviewing the adequacy of the risk management framework in relation to the risks faced by the Bank.

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

Credit risk Credit risk is the risk of financial loss to the Bank if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the placements with financial institutions, investments and Islamic financing facilities.

For risk management reporting purposes, the Bank considers and consolidates all elements of credit risk exposure (such as individual obligor default risk, country and sector risk).

Management of credit riskRisk is assessed on an individual basis for each counterparty and has been reviewed and approved by the Board of Directors as at 31 December 2009. The Bank does not perform a collective assessment of impairment for its credit exposures as the credit characteristics of each exposure is considered to be different. Credit exposures are subject to regular reviews by the Risk Management Department.

The Bank attempts to reduce credit risk by assigning limits for each counterparty, monitoring credit exposure, and continuously assessing the creditworthiness of counterparties.

Maximum credit exposureThe maximum exposure to credit risk has been disclosed below:

2009Bank

balances

Placements with financial

institutionsFinancing

receivablesInvestments

in Sukuk

Derivative financial

instruments Other assets

Prime to High grade: AAA – AA 116 58,445 - 31,694 - -

Medium grade: A – BBB 11,703 228,237 - 62,531 - -

Non-investment/

speculative: BB – B - 107,015 - - - -

Substantial risk: Below B - - - - - -

Doubtful/ Loss - - - - - -

Unrated 531 292,183 138,544 142,748 3,326 5,281

Total carrying amount 12,350 685,880 138,544 236,973 3,326 5,281




None of the exposures were impaired or considered past due as at 31 December 2009. The Bank does not hold collateral against any of its exposures as at 31 December 2009.

The Bank had not implemented its rating model in 2008 as it had just commenced operations. The Bank’s credit risk was primarily from bank balances and placements with financial institutions which were placed with financial institutions having good credit ratings. There was no past due exposure as at 31 December 2008.

2008 Bank balances

Placements with financial

institutions Other assets

Total carrying amount 2,222 970,665 7,833

Market RiskMarket risk is the risk that changes in market prices, 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 the Group’s income or the value of its holdings of financial instruments. Market risk comprises profit rate risk, currency risk and other price risk. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return on risk. The Bank does not have a trading portfolio and does not have listed equity portfolio and hence is not exposed to market risk in relation to such instruments. The different types of risks with exposures, objectives, policies and processes to manage the risk have been detailed hereunder.

Profit rate riskProfit rate risk arises due to differences in timing of re-pricing of the Bank’s assets and liabilities. The principal risk to which non-trading portfolios are exposed is the risk of loss from fluctuations in the future cash flows or fair values of financial instrument because of a change in market profit rates. The Bank’s profit rate sensitive assets are mainly placements with financial institutions, financing receivables and investment in Sukuk. The Bank has exposures to both fixed and floating rate Sukuk. The profit rate risk associated with certain fixed rate Sukuk is reduced by entering Islamic profit rate swaps. Fixed rate sukuk represent 38.4% of the total Sukuk portfolio as at 31 December 2009 and primarily include sovereign obligors only.

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

2009

Up to 3

months

3 to 6

months

6 months

- 1 year

1 to 3

years

Over 3

years TotalAssetsPlacements with financial institutions 565,990 21,663 15,094 83,133 - 685,880Financing receivables 341 - 6,623 85,727 45,853 138,544Investment securities - - 2,294 64,309 170,370 236,973

Total assets 566,331 21,663 24,011 233,169 216,223 1,061,397

LiabilitiesPlacements from financial institutions 171,464 - - - - 171,464

Total liabilities 171,464 - - - - 171,464

Profit rate sensitivity gap 394,867 21,663 24,011 233,169 216,223 889,933





2008

Up to 3

months

3 to 6

months

6 months

-1 year

1 to 3

years

Over 3

years Total

Assets

Placements with financial institutions 970,665 - - - - 970,665

Financing assets - - - - - -

Total assets 970,665 - - - - 970,665

Liabilities

Placements from financial institutions - - - - - -

Total liabilities - - - - - -

Profit rate sensitivity gap 970,665 - - - - 970,665

The management of profit rate risk against profit rate gap limits is supplemented by monitoring the sensitivity of the Group’s

financial assets and liabilities to various standard and non-standard profit rate scenarios. Standard scenarios that are considered on

a monthly basis include a 100 basis point (bp) parallel fall or rise in all yield curves worldwide. An analysis of the Group’s sensitivity

to an increase or decrease in market profit rates (assuming no asymmetrical movement in yield curves and a constant statement

of financial position) is as follows:

100 bps parallel increase / (decrease) 2009 2008

At 31 December + 8,899 + 9,707

Average for the year + 8,887 + 9,695

Maximum for the year + 11,554 + 9,742

Minimum for the year + 6,717 + 9,640

Overall, profit rate risk positions are managed by Treasury, which uses placements from/ to financial institutions to manage the

overall position arising from the Group’s activities.

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

2009 2008

Placements with financial institutions 1.00% 2.39%

Financing receivables 6.00% -

Investment securities 3.50% -

Placements from financial institutions 1.00% -




Currency risk

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

Bank’s major exposure is in GCC currencies, which are primarily pegged to the US Dollars. The Bank does not have significant net

exposures denominated in other foreign currencies as at 31 December 2009 and 31 December 2008.

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

December:

2009US$ Equivalent

2008US$ Equivalent

Sterling Pounds 10 -

Euros 77 -

Other price risk

The Group’s available-for-sale equity securities carried at cost are exposed to risk of changes in equity values. Refer note 3 for

significant estimates and judgements in relation to impairment assessment of available-for-sale equity investments carried at cost.

The Group manages exposure to other price risks by actively monitoring the performance of the equity securities. The performance

assessment is performed on a quarterly basis and is reported to the Board of Directors.

Liquidity risk

Liquidity risk is defined as the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities

that are settled by delivering cash or another financial asset. The Group’s approach to managing liquidity is to ensure, as far as

possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions,

without incurring unacceptable losses or risking damage to the Group’s reputation.

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

reviews the liquidity profile of the Group on a regular basis and any material change in the current or prospective liquidity

position is notified to the Board through the Board Risk Committee. The maturity profile of assets and liabilities has been provided

in note 24.

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

Liquid asset / Total asset

2009 2008

At 31 December 78% 96%

Average for the period 70% 95%

Maximum for the period 92% 96%

Minimum for the period 54% 94%





Operational risk

Operational risk is the risk of loss arising from systems and control failures, fraud and human error, which can result in financial

and reputation loss, and legal and regulatory consequences. The Bank manages operational risk through appropriate controls,

instituting segregation of duties and internal checks and balances. In addition the Bank is committed to the training of its staff.

The Bank is in the process of conducting Risk Control Self Assessment of Operational risk in all departments of the Bank to identify

the important Key Risk Areas and Key Risk Triggers.

31. CAPITAL MANAGEMENT

The Bank’s regulator Central Bank of Bahrain (CBB) sets and monitors capital requirements for the Bank as a whole. The Bank is

required to comply with the provisions of the Capital Adequacy Module of the CBB (based on the Basel II and IFSB frameworks) in

respect of regulatory capital. The Bank has adopted the standardised approach to credit and market risk measurement and basic

indicator approach for operational risk management under the revised framework. In implementing current capital requirements

CBB requires the Bank to maintain a prescribed ratio of total capital to total risk-weighted assets. Banking operations are categorised

as either trading book or banking book, and risk-weighted assets are determined according to specified requirements that seek to

reflect the varying levels of risk attached to assets and off-balance sheet exposures.

The Bank’s policy is to maintain strong capital base so as to maintain investor, creditor and market confidence and to sustain the

future development of the business. Capital requirements of CBB have been complied throughout the period.

The Bank’s regulatory capital position at 31 December was as follows:

Capital adequacy 2009 2008

Total risk weighted assets 1,140,951 1,116,488

Tier 1 capital 830,452 1,000,042

Tier 2 capital - -

Total regulatory capital 830,452 1,000,042

Total regulatory capital expressed as a percentageof total risk weighted assets 72.79% 89.57%

32. NEW INTERNATIONAL FINANCIAL REPORTING STANDARDS AND INTERPRETATIONS ISSUED BUT NOT YET EFFECTIVE

FOR ADOPTION

The following standards and interpretations have been issued by standard setters during 2009 and are mandatory for the Group’s

accounting for annual periods beginning on or after 1 July 2009 or later periods and are expected to be relevant to the Group:




a) International Financial Reporting Standards and interpretations issued by the IASB

• IFRS 3, ‘Business combinations’

Revised IFRS 3 Business Combinations (2008) incorporates the following changes that are likely to be relevant to the Group’s

operations:

• The definition of a business has been broadened, whichmay result inmore acquisitions being treated as business

combinations.

• Contingentconsiderationwillbemeasuredatfairvalue,withsubsequentchangesinfairvaluerecognisedinprofitor

loss.

• Transactioncosts,otherthanshareanddebtissuecosts,willbeexpensedasincurred.

• Anypre-existinginterestinanacquireewillbemeasuredatfairvalue,withtherelatedgainorlossrecognisedinprofit

or loss.

• Any non-controlling (minority) interestwill bemeasured at either fair value, or at its proportionate interest in the

identifiable assets and liabilities of an acquiree, on a transaction-by-transaction basis.

The Group will apply IFRS 3 (revised) prospectively to all business combinations from 1 January 2010 and therefore there will

be no impact on prior periods in the Group’s 2010 consolidated financial statements.

• IAS 27 Consolidated and Separate Financial Statements (amended 2008)

The revised standard requires the effects of all transactions with non-controlling interests to be recorded in equity if there is

no change in control and these transactions will no longer result in goodwill or gains and losses. The standard also specifies

the accounting when control is lost; any remaining interest in the entity is re-measured to fair value, and a gain or loss is

recognised in profit or loss. The Group will apply IAS 27 (revised) prospectively to transactions with non-controlling interests

from 1 January 2010. In the future, this guidance will also tend to produce higher volatility in equity and/or earnings in

connection with the acquisition of interests by the Group.

• IFRS 9 ‘Financial Instruments’

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

financial assets. Key features are as follows:

• Financialassetsarerequiredtobeclassifiedintotwomeasurementcategories:thosetobemeasuredsubsequentlyat

fair value, and those to be measured subsequently at amortised cost. The decision is to be made at initial recognition.

The classification depends on the entity’s business model for managing its financial instruments and the contractual cash

flow characteristics of the instrument.

• Aninstrumentissubsequentlymeasuredatamortisedcostonlyifitisadebtinstrumentandboththeobjectiveofthe

entity’s business model is to hold the asset to collect the contractual cash flows, and the asset’s contractual

cash flows represent only payments of principal and interest (that is, it has only ‘basic loan features’). All other debt

instruments are to be measured at fair value through profit or loss.

• Allequityinstrumentsaretobemeasuredsubsequentlyatfairvalue.Equityinstrumentsthatareheldfortradingwill

be measured at fair value through profit or loss. For all other equity investments, an irrevocable election can be made at

initial recognition, to recognise unrealised and realised fair value gains and losses through other comprehensive income

rather than profit or loss. There is to be no recycling of fair value gains and losses to profit or loss. This election




32 NEW INTERNATIONAL FINANCIAL REPORTING STANDARDS AND INTERPRETATIONS ISSUED BUT NOT YET EFFECTIVE FOR ADOPTION

(continued)

may be made on an instrument-by-instrument basis. Dividends are to be presented in profit or loss, as long as they represent

a return on investment.

• WhileadoptionofIFRS9ismandatoryfrom1January2013,earlieradoptionispermitted.

The Group is currently in the process of evaluating the potential effect of this standard. Given the nature of the Group’s

operations, this standard is expected to have a pervasive impact on the Group’s financial statements.

• Improvements to IFRSs

Improvements to IFRS issued in April 2009 contained numerous amendments to IFRS that the IASB considers non-urgent

but necessary. ‘Improvements to IFRS’ comprise amendments that result in accounting changes to presentation, recognition

or measurement purposes, as well as terminology or editorial amendments related to a variety of individual IFRS standards.

The amendments are effective for annual periods beginning on or after 1 January 2010 with earlier adoption permitted. No

material changes to accounting policies are expected as a result of these amendments.

b) Financial Accounting Standards issued by AAOIFI

• FAS 23 Consolidation (effective for annual periods beginning on or after 1 January 2010); and

• FAS 24 Investment in Associates (effective for annual periods beginning on or after 1 January 2010).

The requirements of these standards are largely in line with the current policies followed by the Group for accounting of subsidiaries

and associates and the adoption of these standards are not expected to have any material impact on the consolidated financial

statements.

c) The Group had not early adopted any new or amended standards in 2009.

33. COMPARATIVES

Certain prior year amounts have been regrouped to conform to the current year’s presentation. Such regrouping did not affect

previously reported profit, comprehensive income or equity.


The accompanying notes 1 to 33 form an integral part of these consolidated financial statements.


Risk and Capital Management


Contents

1 Executive Summary 85

2 Introduction 85

2.1 Pilar I 85

2.2 Pilar II 86

2.3 Pilar III 86

3 Overall Risk and Capital Management 86

3.1 Risk Management Strategy 86

3.2 Risk Management Framework 87

3.3 Capital Management 87

3.4 Risk Types 87

4 Capital Structure and Capital Adequacy Ratio 87

4.1 Capital and Group Structure 87

4.2 Capital Adequacy 88

5 Credit Risk 89

5.1 Credit Risk Management 89

5.2 Capital Requirements for Credit Risk 89

5.2.1 Credit exposure and risk-weighted assets 90

5.2.2 Movement in credit exposure 90

5.2.3 Concentration of credit risk 91

5.3 Quantitative Information on Credit Risk 91

5.4 Counterparty Credit Risk 91

6 Market Risk 91

6.1 Capital requirements for market risk 92

7 Operational Risk 92

7.1 Operational Risk Management 92

7.2 Legal Compliance and Litigation 92

7.3 Sharia’a Compliance 92

7.4 Capital Requirements for Operational Risk 93

8 Liquidity Risk 93

9 Profit Rate Risk in the Banking Book 93

10 Reputational Risk 94

11 Strategic Risk 94

12 Other Risks 94

Basel II - Pillar III Disclosures


1 Executive summary

First Energy Bank B.S.C. (c) (‘FEB’/ ‘the Bank‘) was incorporated on 23 June 2008 in the Kingdom of Bahrain under Commercial Registration No. 69089. The Bank operates as an Islamic Wholesale Bank under a license granted by the Central Bank of Bahrain (‘CBB’). The principal activities of the Bank include investment banking services which comply with Islamic rules and principles as determined by the Sharia’a Supervisory Board of the Bank.

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

This report contains a description of the Bank’s risk management and capital adequacy risk and practices, including detailed information on the capital adequacy process. The Bank has been in compliance with the minimum capital adequacy ratios prescribed by the CBB throughout 2009.

The disclosures in this report are in addition to or in some cases, serve to clarify the disclosures set out in the financial statements for the period ended 31 December 2009, presented in accordance with the Financial Accounting Standards (FAS) issued by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and International Financial Reporting Standards (IFRS). To avoid any duplication, information required under PD module but already disclosed in other sections of the Annual report has not been produced in these disclosures.

2 Introduction

The Basel II based framework provides a more risk sensitive approach for the assessment of risk and the calculation of regulatory capital i.e. the minimum capital that a bank is required to maintain. The framework intends to strengthen the risk management practices and processes within financial institutions. FEB has accordingly taken steps to comply with these requirements. The CBB’s capital management framework, consistent with the Basel II accord, is built on three pillars:

•PillarI:calculationoftheriskweightedamountsandcapitalrequirement.

•PillarII:thesupervisoryreviewprocess,includingtheInternalCapitalAdequacyAssessmentProcess.

•PillarIII:rulesforthedisclosureofriskmanagementandcapitaladequacyinformation.

2.1 Pillar I

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

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

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

The table below summarizes the Pillar I risks and the approaches used by the Bank for calculating the RWAs in accordance with the

CBB’s Basel II capital adequacy framework.


Risk Type Approach used by FEB

Credit risk Standardised Approach

Market risk Standardised Approach

Operational risk Basic Indicator Approach

2.2 Pillar IIPillar II deals with the Supervisory Review and Evaluation Process (SREP). It also addresses the Internal Capital Adequacy Assessment Process (ICAAP) to be followed by Banks to assess the overall capital requirements to cover all relevant risks (including those covered under Pillar I).

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

The ICAAP incorporates a review and evaluation of risk management and capital relative to the risks to which the bank is exposed. FEB is currently developing an ICAAP around its economic capital framework which involves identification and measurement of risks to maintain an appropriate level of internal capital in alignment to the Bank’s overall risk profile and business plan. Currently no additional capital is being allocated to these risk components considering the current healthy capital adequacy position of the bank. However, the Bank monitors and reports on these risks to the Board of Directors on a quarterly basis.

2.3 Pillar IIIIn the CBB’s Basel II framework, the Pillar III prescribes how, when, and at what level information should be publicly disclosed about an institution’s risk management, governance and capital adequacy practices. The disclosures comprise detailed qualitative and quantitative information. The purpose of the Pillar III disclosure requirements is to complement the first two Pillars and the associated supervisory review process. The disclosures are designed to enable stakeholders and market participants to assess an institution’s risk appetite and risk exposures and to encourage all banks, via market pressures, to move towards more advanced forms of risk management.

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

3 Overall risk and capital management

3.1 Risk management strategyFEB perceives good risk management capabilities to be the foundation in delivering results to customers, investors and shareholders. The Bank will continue to endeavor to adopt international best practices of risk management, superior corporate governance and the highest level of market discipline.

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

•ManagerisksinherentintheBank’sactivitiesinlinewiththeriskappetiteoftheBank;

•StrengthentheBank’sriskmanagementpracticestoreflecttheindustrybestpractices;and

•Aligninternalcapitalrequirementswithriskmateriality.

Risk and Capital Management (continued)


The risk strategy is articulated through the limit structures for individual risks. These limits are based on the Bank’s business plans and guided by the regulatory requirements and guidelines. By defining the risk appetite, the Bank links its individual risks to its strategy. The risk appetite defines the level of risk that FEB is prepared to take in order to achieve its objectives. The Bank reviews and realigns its risk appetite as per the evolving business plan of the Bank with changing economic and market scenarios. The Bank will also assess its tolerance for specific risk categories and its strategy to manage these risks. The risk appetite outlines the Bank’s risk exposures and defines its tolerance levels towards accepting or rejecting these risks. Tolerance levels are reflected in the limits defined by the Bank for each risk area.

3.2 Risk management frameworkThe Bank’s Board of Directors through its Risk Committee (a sub committee of the Board of Directors) has the responsibility for ensuring the establishment and effective implementation of an integrated risk management framework for the Bank. Further, the Risk Management Department is empowered to independently identify and assess risks that may arise from the Bank’s investing, financing and operating activities; as well as recommend directly to the Risk Management Committee any prevention and mitigation measures as it deems fit. In addition, the Internal Audit function, which is also independent of both operations and the Bank’s investments units, shall review in the risk management process.

3.3 Capital managementThe Bank’s policy is to maintain a strong capital base and meet the minimum capital requirements imposed by the regulator (CBB), so as to maintain investor, creditor and market confidence and to sustain future development of the business. The impact of the level of capital on shareholders’ return is also recognised and the Bank recognises the need to maintain a balance between the returns and security afforded by a sound capital position.

The allocation of capital between specific operations and activities is primarily driven by regulatory requirements. The Bank’s capital management policy seeks to optimize returns within the internally defined risk tolerances while satisfying all the regulatory requirements.

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

3.4 Risk typesAs an Islamic investment bank dealing predominantly in alternative assets, the Bank is exposed to various risks in the normal course of its business and these risks include:

a. Credit risk

b. Market risk

c. Operational risk

d. Liquidity risk

e. Profit rate risk in banking book

f. Reputational risk

g. Strategic risk

h. Counterparty credit risk

i. Other risks (including Displaced commercial risk (DCR), etc.)

The details of components of risks and how they are managed are discussed in the following sections of this document.

4 Capital structure and capital adequacy ratio

4.1 Capital and group structureThe authorized share capital of the Bank is 2 billion shares of US$ 1 each. The paid up capital of the Bank is US$ 1 billion divided into 1 billion shares of US$ 1 each.

The Bank fully consolidates all its subsidiaries for capital computation purposes. The Bank’s associates qualify as commercial entities and their exposure is risk weighted in accordance with applicable capital computation guidelines of the CBB.


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

As at 31 December 2009, the following exposures were deducted from the capital base for calculating the eligible capital base:

USD 000’s

Exposure type Investment amount

Exposure as %age to eligible capital

Capital deduction amount

Equity and financing exposure in an associate

379,607 36% 224,076

4.2 Capital adequacyThe Bank’s regulator (CBB) sets and monitors capital requirements for the Bank. In implementing current capital requirements, CBB requires the Bank to maintain a prescribed ratio of 12% of total capital to total risk-weighted assets.

The Bank has adopted the standardised approach to credit and market risk and basic indicator approach for operational risk management under the revised framework. The Bank’s regulatory capital position at

31 December 2009 was as follows:

USD 000’s

Tier 1 Tier 2 Total

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

Statutory reserve 1,437 - 1,43

Others 2,478 - 2,478

Retained earnings 12,940 - 12,940

Minority interest in consolidated subsidiaries 37,674 - 37,674

Less regulatory deduction:

Excess amount over maximum permitted large exposure limit 224,076 - 224,076

Total eligible capital base 830,452 - 830,452

USD 000’s

Risk weighted exposureRisk

weighted exposure

Capital requirement @

12%Credit Risk 898,618 107,834.13

Market risk 88 10.5

Operational 242,245 29,069.48

Total 1,140,951 136,914.11

Capital Adequacy Ratio 72.79%

Tier 1 capital adequacy ratio 72.79%



5 Credit risk

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

5.1 Credit risk managementThe credit risk exposures faced by the Bank are in respect of its short term liquidity related placements with other financial institutions, Islamic financing facilities made to corporate clients, and in respect of investment related funding made to projects. The investment related funding exposures arise in the ordinary course of its investment banking activities and are generally transacted without collateral or other credit risk mitigants.

Credit Management Department (CMD) is responsible for conducting independent risk review and analyzes for all credit applications received from Investment Banking, Islamic Finance, and Treasury Departments. It is also responsible for the ongoing review of the credit worthiness of existing clients through the process of periodic credit reviews, annual or more frequently if required. The CMD is also responsible for monitoring all approved limits, and reporting breaches to the RMC and the Board, if any.

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

After the credit is approved and draw down allowed, the credit exposures are monitored on an ongoing basis. These include keeping track of counterparties’ compliance with credit terms, identifying early signs of irregularity, conducting periodic valuation of collateral, if applicable, and monitoring timely repayments.

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

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

In line with the CBB guidelines, exposures on which principal or profits have not been paid on due date are considered to be past due and the exposures which are past due for more than 90 days is considered to be sub-standard and will trigger an assessment for impairment. The Bank assesses its credit portfolio for any indicators of impairment on a periodic basis and would consider provision for impairment on specific credit exposures. As of 31 December 2009, the Bank did not have any exposure which would require impairment. Currently, the bank does not have a sizeable credit portfolio for assessment of impairment on a collective basis. The Bank shall write-off the exposures (fully / partial as the case may be) when there is reasonable doubt over recovery of the amount. Reasonable doubt is the objective evidence that the balance is impaired and would not be recovered.

5.2 Capital requirements for credit riskThe Bank uses the Standardised Approach under the Basel II framework for measuring its credit risk. The Bank depends, where available on ratings from External Credit Assessment Institution recognised by the CBB (S&P, Moody’s, Fitch, and Capital Intelligence) for its banks’ counterparty exposures. Moreover, a detailed credit risk assessment of all obligors is performed independently by the credit risk management department, and approved by the Credit Committee. The Bank attempts to reduce credit risk by assigning limits for each counterparty, monitoring credit exposure, and continuously assessing the creditworthiness of counterparties.

The Bank currently is not engaged in providing retail credit facilities and hence it does not currently use a comprehensive credit “scoring” models. The current credit facilities are linked to its investment products/ projects and have been offered on a case-by-case basis. These exposures are evaluated for credit risk on a specific risk assessment basis on each reporting period. The Bank has currently implemented a rating model to evaluate its exposures to financial institutions and rates the exposures in the following credit grades – Prime, High Grade, Upper Medium Grade, Low Medium Grade, Non-Investment Grade, High Speculative, Substantial Risk, Extremely Speculative, In default with little prospect of Recovery and In default. Please refer Note 30 of the consolidated financial statements for details of the credit grading of exposures as at 31 December 2009.


5.2.1 Credit exposure and risk-weighted assets Following is the components of credit risk as computed for regulatory capital adequacy purposes as at end December 2009:

USD 000’s

Asset categories for credit risk Credit exposures

Average risk weights

Credit risk weighted assets

Capital requirements

Cash items 8 0% - -

Total claims on sovereigns 45,454 0% - -

Total claims on MDBs 2,294 0% - -

Total claims on banks 698,230 29% 201,668 24,200

Claims on corporate 220,920 100% 220,920 26,510

Investment in securities and sukuks 246,016 150% 369,024 44,283

Holding of real estate 54,260 174% 94,260 11,311

Other assets and specialized financing

12,746

100% 12,746 1,530

Total credit risk weighted assets 1,279,928 898,618 107,834

5.2.2 Movement in credit exposureThe table below shows the movement of Gross credit exposure during the period along with average credit exposure broken down under different exposure classes.

USD 000’s

Average

exposures * Gross exposure

Cash and bank balances 22,181 12,358Placements with financial institutions 785,626 685,880Financing receivables 38,430 138,544Investment securities 140,712 236,973Investment in associates 24,197 96,787Other assets 146,676 42,333Property and equipment 18,431 21,044 Total funded exposures 1,176,253 1,233,919 Commitment to finance 213,900 204,000Other capital commitments 17,190 62,511Land acquisition 2,847 -Operating lease commitments 893 3,573 Total 1,411,083 1,504,003

* Represents quarterly average balance for the year 2009.



5.2.3 Concentration of credit riskThe industry and sector-wise distribution has been detailed in note 25 to the consolidated financial statements for the year ended 31 December 2009.

5.2.4 Equity investments held in banking book The Bank does not have a trading book and hence all of its equity investments are classified in the banking book and are subject to credit risk weighting under the capital adequacy framework. For regulatory capital computation purposes, the Bank’s equity investments in the banking book include available-for-sale investments and associate investments in non-significant financial and non-financial entities.

Investments are not carried at fair value hence there was no unrealised gain recognised in the profit and loss account or equity.

Below is a breakdown of the bank’s equity investments by objectives and market type as at 31 December 2009.

Objective Type Exposure(USD 000’s)

Risk Weight

%

Risk weighted exposure

(USD 000’s)

Capital requirement(USD 000’s)

Capital gain Unquoted 40,000 200 80,000 9,600

Strategic Unquoted 181,707 150 272,561 32,708

5.3 Quantitative information on credit riskFor information related to the geographic and industry-wise concentration of credit risk exposures and maturity profile of financial assets, refer to the notes to the audited financial statements. The Bank did not have any exposure to highly leveraged and other high risk counterparties, past due, renegotiated or impaired credit exposures as at 31 December 2009. The Bank has total unfunded commitments of USD 270 million, within the GCC region and primarily in the energy and real estate sector.

5.4 Counterparty credit riskCounterparty credit risk is the risk that a counterparty to a contract in the profit rate, foreign exchange, equity and credit markets defaults prior to maturity of the contract. The Bank’s counterparty credit risk as such is limited to the fair value of contracts of profit rate swap risk management instruments the overall exposure to which is usually not significant. For other “Counterparty Credit Risks” (primarily inter-bank placements), the Bank has established a limit structure based on the credit quality (assessed based on external rating) of each counter party bank to avoid concentration of risks for counterparty, sector and geography. The Bank is constantly reviewing and monitoring the position to ensure proper adherence to the limits and defined policies of the Bank.

6 Market riskMarket risk is the risk that changes in market prices, 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 the Bank’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return on risk.

The bank uses the Standardized approach under the Basel II Framework for measuring its marker risk.

The bank does not maintain a trading portfolio in commodities, equities or Sukuk. Therefore, exposure to market risk remained minimal. As at end 2009, the bank’s major source of market risk was from Foreign Exchange net currency positions which resulted in capital charge of $11,000. The Bank is also exposed to foreign exchange translation risk from its investment in foreign operations (associate in Libya) which is currently un-hedged.

The different types of risks with exposures, objectives, policies and processes to manage the risk have been detailed in note 30 of the consolidated financial statement for the year ended 31 December 2009.


6.1 Capital requirements for market risk

To assess its capital adequacy requirements for market risk in accordance with the CBB capital adequacy module for Islamic Banks, the Bank adopts the standardised approach. Foreign exchange risk charge is computed based on 8% of overall net open foreign currency position of the Bank and is risk weighted by multiplying with a multiple of 12.5 times.

USD 000’s

Risk weighted assets

Capital requirement @

12%

Maximum during the year

Minimum during the year

Foreign exchange risk 88 11 11 11

7 Operational risk

Operational risk is the risk of loss arising from systems and control failures, fraud and human error, which can result in financial and reputation loss, and legal and regulatory consequences. The Bank manages operational risk through appropriate controls, instituting segregation of duties and internal checks and balances. In addition the Bank is committed to the training of its staff.

For regulatory capital computation purposes, the Bank uses the Basic Indicator Approach under the Basel II Framework for measuring its operational risk.

7.1 Operational risk management

Currently, the Bank conducts its business from a single location.

Notwithstanding this, the Bank’s operations are conducted according to well-defined process and procedures. These process and procedures include a broad system of internal controls, including segregation of duties and other internal checks, which are designed to prevent either inadvertent staff errors or malfeasance prior to the release of a transaction.

The Bank has already started the process of conducting Risk Control Self Assessment of Operational risk in all departments of the Bank to identify the important Key Risk Areas and Key Risk Triggers. All relevant policies and procedures have been developed and are expected to be fully implemented by Q2 2010.

7.2 Legal compliance and litigation

As on the reporting date, the Bank had no material legal contingencies including pending legal actions. The Bank’s legal risks are mitigated through legal counsel review of transactions and documentation, as appropriate. Where possible, the Bank uses standard formats for transaction documentation.

7.3 Sharia’a complianceThe Sharia’a Supervisory Board (SSB) is entrusted with the duty of directing, reviewing and supervising the activities of the Bank in order to ensure that they are in compliance with the rules and principles of Islamic Sharia’a. The Bank also has a dedicated internal sharia’a reviewer, who is responsible to perform an ongoing review of the compliance with the fatwas and rulings of the SSB on products and processes and also reviews compliance with the requirements of the Sharia’a standards prescribed by AAOIFI. The SSB reviews and approves all products and services before launching and offering to the customers and also conducts periodic reviews of the transactions of the Bank. An annual audit report is issued by the SSB confirming the Bank’s compliance with Sharia’a rules and principles.



7.4 Capital requirements for operational riskThe Bank adopts the Basic Indicator Approach to evaluate operational risk charge in accordance with the CBB capital adequacy module for Islamic Banks. According to this approach, Bank’s average gross income for three past financial years is multiplied by a fixed coefficient alpha of 15% set by CBB and a multiple of 12.5x is used to arrive at the risk weighted assets that are subject to capital charge. As the Bank has been recently set up, the Bank uses 1 year’s actual gross income and 2 year’s budgeted gross income for computation of operational risk capital requirements.

US$ 000’s

Average gross income

Risk weighted assets

Capital charge at 12%

Operational risk 129,198 242,245 29,069.48

8 Liquidity risk

Liquidity risk is the risk that the Bank will encounter difficulty in meeting obligations arising from its financial liabilities. The Bank’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when they become due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Bank’s reputation.

The Board of Directors approve policies and strategies related to the management of liquidity. The Management reviews the liquidity profile of the Bank on a regular basis and any material change in the Bank’s current or prospective liquidity position is notified to the Board through respective management committees.

The following are the key liquidity ratios which reflect the liquidity position of the Bank as at end 31 December 2009

Liquidity Ratios Report31 December

2009

Ratio Actual

1 Liquid Assets to Total Assets % 78%

2 Short-term Assets / Short-term Liabilities 3.7x

For a detailed maturity profile of assets and liabilities of the Bank, refer to note 24 of the consolidated financial statements for the year ended 31 December 2009.

9 Profit rate risk in the banking book

As a financial intermediary, FEB may encounter profit margin risks that arise from timing differences in the maturity and re-pricing of the Bank’s assets and liabilities. While such re-pricing mismatches are fundamental to the business of banking, these can expose a bank’s income and underlying economic value to unanticipated fluctuations as profit margins vary. This however, is not a major source of risk for the Bank.

The Risk Management Committee is responsible for recommending the profit rate policy, setting limits and guidelines. The ALCO is responsible for the overall management of the profit rate risk and monitoring the risk on a regular basis. ALCO also determines the borrowing and funding strategy of the Bank in order to optimize risk return trade off.

The Bank’s profit rate sensitive assets comprise; placements with financial institutions, Sukuk investments and Islamic Financing Facilities. On the liabilities side, the bank’s profit bearing liabilities includes mainly placements from financial institutions. Profit rate risk is managed


principally through monitoring profit rate gaps and by having pre-approved limits for re-pricing bands. The Bank has exposures to both fixed and floating rate Sukuk. The profit rate risk associated with certain fixed rate Sukuk is reduced by entering Islamic profit rate swaps. Fixed rate sukuk represent 38.4% of the total Sukuk portfolio as at 31 December 2009 and primarily include sovereign obligors only.

Please refer to note 30 of the audited financial statements for a detailed profit rate gap position of the Bank as at 31 December 2009.

10 Reputational risk

Reputational risk is the risk that negative perception regarding the Bank’s business practices or internal controls, whether true or not, will cause a decline in the Bank’s investor base, lead to costly litigation that could have an adverse impact on liquidity or capital of the Bank. Reputation is an important asset and among the issues that could affect the Bank’s reputation is the inability to exit from investments, lower than expected returns on investments and poor communication with investors. As at 31 December 2009, the Bank was not exposed to any significant reputational risk. The Bank has developed adequate policies and procedures to identify, monitor and address all potential risks that may arise from all such activities.

Process of logging investors/customers complaints:

The Bank considers complaints from all investors/customers seriously. These can adversely affect the Bank’s reputation and if it is left unattended these can also lead to litigation and possible censure by the regulatory authorities. Bank has a formal process of handling complaints from investors/customers which is as follows:

Relationship Mangers (RM) are designated the responsibility to receive all investor grievances which are forwarded to Investment Placement (IP) Administration unit for resolution. The unit maintains a log of all investor grievances received. IP Administration unit shall work towards resolving all investor/customer queries and inform respective RM within 36 working hours. Any investor grievance which does not get resolved by the RM immediately gets escalated to the DCEO Chief Placement Officer. All client queries, grievance logs and forms are subject to review by the DCEO and Chief Placement Officer on a fortnightly basis.

11 Strategic Risk

Strategic risk is the current and prospective impact on earnings or capital arising from adverse business decisions, improper implementation of decisions, or lack of responsiveness to industry changes. Strategic risk management practices are designed to ensure the comparability of the bank’s strategic goals, the resources deployed against these goals and the quality of implementation.

12 Other risks

Other risks include fiduciary risks, displaced commercial risk, regulatory compliance risks etc. which are inherent in all business and are not easily measurable or quantifiable. However, the bank has proper policies and procedure to mitigate and monitor these risks. The Bank’s Board is overall responsible for approving the risk strategies, risk policies and significant amendments to the risk policies. The Bank’s senior management is responsible for implementing the strategies and policies approved by the Board to identify, measure, monitor and control the risks faced by the Bank. The Bank as a matter of policy regularly reviews and monitors financial and marketing strategies, business performance, new legal and regulatory development and its potential impact on the Bank’s business, best corporate governance practices and implementation etc.


First Energy Bank B.S.C. (c)

P.O. Box 209, Manama, Kingdom of Bahrain

Tel +973 17170000, Fax +973 17170170

www.1stenergybank.com

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