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Annual Report 2013

driven by you

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Contents

Welcome Message 3

Executive Summary 4

Financial Highlights 6

Chairman’s Statement 8

CEO’s Statement 10

Review of the Year – Kuwait Operations 14

Corporate Social Responsibility Report 16

Corporate Governance and Disclosures 22

Management Team 32

Financial Review 38

Burgan Bank S.A.KP.O. Box 5389 Safat 12170State of KuwaitTelephone: +965 22988000Fax: +965 22988419www.burgan.com

The Dar al-Athar al-Islamiyyah is one of Kuwait’s leading cultural organisations and home to the al-Sabah Islamic art collection – acknowledged as one of the world’s finest collections of Islamic art. The collection consists of over 30,000 priceless objects, including manuscripts, scientific instruments, carpets, fabrics, jewellery, ceramics, ivory, metalwork and glass dating from the seventh century CE from countries such as Spain, India, China and Iran.

This year, the annual reports of KIPCO Group companies each feature a different key ceramic artefact from The al-Sabah Collection. The images used within the reports reflect KIPCO’s commitment to protecting and promoting Kuwait’s heritage, while helping to build the nation’s future.

The item pictured here (LNS 187 C ) is a vessel in albarello style, made in Syria – probably in Damascus – in the 14th Century CE. The excellent condition and provenance of this piece suggest that it was traded into Europe during the medieval period. The image is reproduced with the kind permission of the Dar al-Athar al-Islamiyyah.

The KIPCO Group is one of the biggest holding companies in the Middle East and North Africa, with consolidated assets of US$ 30.5 billion as at 31 December, 2013. The Group has significant ownership interests in over 60 companies operating across 24 countries. The group’s main business sectors are financial services, media, real estate and manufacturing. Through its core companies, subsidiaries and affiliates, KIPCO also has interests in the education and medical sectors.

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H.H. Sheikh SabahAl-Ahmad Al-Jaber Al-SabahAmir of the State of Kuwait

H.H. Sheikh NawafAl-Ahmad Al-Jaber Al-SabahCrown Prince of the State of Kuwait

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Welcome to our Annual Review for the year 2013

Welcome to our Annual Review for the year 2013, a

year which enabled the Group to continue to build

on its achievements and which demonstrated a solid

underlying performance for the Group on all levels.

Throughout the year, the Group was able to adapt

its smart growth strategies to absorb global and

regional uncertainty and to maintain its position

as one of the most solid and leading financial

institutions in the Middle East, North Africa and

Turkey (MENAT).

The Group was able to sustain its growth successfully

through calculated moves as it introduced new

strategic initiatives and enhanced services and

products. The franchises grew in the markets from

which they operate, and the Group’s underlying

performance remains solid as operating profit

increased by 18.3% year on year.

During 2013, the Group’s performance was

recognised both on a regional and international

level by highly regarded organisations. The Bank was

awarded “Best Banking Group in Kuwait”, by World

Finance, “Best Banking Group MENA 2013” by Global

Banking and Finance Review, as well as “MENA Bank

of the Year”, by ACQ Global Award. Our business

lines were also awarded as Private Banking won

‘Best Private Bank in Kuwait 2013’ by Capital Finance

International, and Retail Banking won “Best Domestic

Retail Bank of the Year” by Asian Banking and

Finance Magazine.

Burgan Bank Group’s performance proudly

reflects its high commitment to all its stakeholders;

shareholders, customers, communities, and

employees. The Group aims at achieving calculated

and smart growth through excellence, high standards

of achievements, and sound flexible strategies.

Supported by a strong talented team of banking

professionals, Burgan Bank Group is well poised

for future success and growth.

We assure the explanations in the report are

approved by the board of directors and are

comprehensive and based on the published

financial statements of the bank and the

management’s vision.

Burgan Bank Group

Members of the Burgan Bank Group

driven by you

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Executive Summary

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Key highlights in 2013

Solid operating performance with a speed of growth faster than markets

Enhanced risk position; both asset quality and coverage ratio showing considerable improvement

Healthy leading indicators to sustain solid operating performance

Enhanced synchronisation and business generation between Group members

Retail banking returns to profitability

Burgan Bank 2013 ratings

Rating agency Rating highlights

Standard & Poor’s BBB+ / A2 (Long / Short Term)

Moody’s Bank Deposit Rating A3 / P-2Bank Financial Strength Rating D+

Capital Intelligence Foreign Currency A- / A2 (Long / Short Term)Financial Strength BBB

About Burgan Bank Group

Established in 1977, Burgan Bank is the youngest commercial Bank and third largest by assets in Kuwait, with a significant focus on the corporate and financial institutions sectors, as well as having a growing retail and private bank customer base.

Burgan Bank has five majority owned subsidiaries, which include Gulf Bank Algeria – AGB (Algeria), Bank of Baghdad – BOB (Iraq & Lebanon), Jordan Kuwait Bank – JKB (Jordan, Palestine and Cyprus), Tunis International Bank – TIB (Tunisia), and Burgan Bank – Turkey, (collectively known as the “Burgan Bank Group”).

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Performance summary

Burgan Bank Group continues to be on a smart growth

trajectory as it did for the past three years and 2013

has fitted well within this trajectory. The business and

operating model of the Group has proven successful

despite less favourable and highly volatile local,

regional as well as global markets. Our strategies are

simple, flexible, and highly adaptable and our ability

to execute in numerous and changing conditions has

proven remarkable as we have continued to deliver

growth and underlying solid performance.

We have met the objective set for 2013 as we

generated tangible results for all our stakeholders:

shareholders, customers, employees and

communities. We have managed to sustain our

growth by applying smart and calculated initiatives

throughout the Group which have enabled us to

enhance our position and acquire market share

within the regions we operate from.

During 2013 the Group maintained adequate

and efficient capitalisation levels combined with

improved asset quality and liquidity. Our risk to return

architecture has played an efficient role in managing

and shaping our growth; our balance sheet remains

healthy with sound liquidity levels at 32.0% and

with Capital Adequacy ratio at 15.4% as the end

of December 31, 2013.

The Group’s underlying performance remains solid

with operating income surging to KD 254 million

registering a growth of 33.4% while operating profits

before provisions soared to register KD 141 million

reflecting a growth of 18.3% year on year.

Sustainable growth inertia and diversification of

revenue streams are the main characteristics that

describe the Group’s performance and direction

in the upcoming period.

Burgan Bank Group is on the right trajectory. During

2014, the Group will continue to build on its growth

plans while adapting international best practices,

enhancing Group synchronisation and focusing on

business optimisation and growing market share.

The 2013 Annual Report provides shareholders with

an overview of the Group’s financial and business

performance highlights as well as financials and

disclosures.

A copy of the annual report can be obtained from

www.burgan.com, or also, if you would prefer to

receive a printed copy of the annual report, please

contact us on +965 2298 8000 or send an email

to [email protected]

Return on Tangible Equity(Excluding additional provisions)

+ 23.3%

Return on Equity(Excluding additional provisions)

+ 14.8%+Operating Profit Growth(Before provisions)

18.3%

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Financial Highlights

2013 was a year that proved the strength of Burgan

Bank’s operating model and the resilience of its

formula. During 2013, the Bank reported a solid

growth in the underlying performance and a

significant improvement in the asset quality despite

the complexity of the local and regional operating

environments. Compared to the same period last

year, operating income surged to KD 254 million

registering a growth of 33% while operating profits

before provisions soared to register KD 141 million

reflecting a growth of 18.3%. The solid consistent

growth over the past quarters clubbed with the

positive leading indicators, enabled the Bank to

accelerate the reserves build up out of prudence.

Reserves outstanding in 2013 reached KD 232.5

million. The Group’s net profit for the year 2013

reported at KD 20.1 million.

The strong operating performance during the

financial year 2013 delivered a continuous solid

growth in all business lines. Loans & advances went

up to KD3.95 billion while customers deposits grew

to KD4.6 billion registering annual growth of 17%

and 19% respectively. Net interest income grew by

39% while net fees and commission grew by 17%

compared to 2012.

2013 was a complex year due to the uncertainty that

faced the regional operating environment, yet again,

every analysis confirms that Burgan’s underlying

performance remains solid and is enabled the Bank

to parapet reserves to further enhance its asset

quality and build a strong war chest against any

surprises. Hence, the decision to book KD 52.6 million

as a precautionary reserves, a step that is highly

encouraged by the Central Bank of Kuwait.

Asset quality improved in 2013. A significant drop

registered in non-performing assets to reach 1.6% to

gross facilities (net of collaterals) while coverage ratio

has increased to reach 256%. Capital adequacy ratio

at end of December 2013 reported at 15.4%.

The Group’s leading financial indicators continue

to point to the right direction. Regional operations

remain profitable and are contributing 54% to the

group’s revenues.

The consolidated financials encompass the results of

the Group’s operations in Kuwait, and its share from

its regional subsidiaries, namely Jordan Kuwait Bank,

Gulf Bank Algeria, Burgan Bank – Turkey, Bank of

Baghdad, Tunis International Bank, in which Burgan

Bank owns a majority stake. Burgan Bank Group has

grown in 2013 and has one of the largest regional

branch networks with more than 231 branches across

Kuwait, Turkey, Jordan, Algeria, Iraq, Tunis, Lebanon

and Palestine.

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2009 2010 2011 2012 2013Consolidated balance sheet KD 000’s

Cash and cash equivalents 602,088 624,939 567,352 787,468 1,004,290Treasury bills and bonds with CBK and others 417,049 466,969 419,079 483,588 583,647Investment securities 140,952 132,578 148,585 311,021 421,402Total assets 4,101,771 4,147,461 4,551,772 5,972,938 7,154,751Total liabilities 3,665,710 3,608,837 3,986,063 5,353,107 6,534,924Shareholders’ Equity 325,475 420,427 447,288 490,725 475,458

Consolidated Income Statement

Net interest income 101,829 106,849 104,577 118,940 165,435Net fee and commission income 29,966 32,623 38,114 38,143 44,623Operating income 154,709 164,873 163,381 190,116 253,559Operating profit before provision 111,173 99,614 101,962 118,934 140,723Net profit 6,211 4,655 50,562 55,600 20,102

Earnings per share (in fils) 5.7 3.4 33.7 36.0 13.0

111 100

09 10

102

11

119

12

Shar

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– K

D m

illio

ns 325

09

420

10

447

11

491

12

Tota

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KD

mill

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s

155

09

165

10

163

11

190

12

Ass

ets

– K

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4.1

09

4.1

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4.6

11

6

12

141

13

475

13

254

13

7.2

13

Op

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pro

fit

– K

D m

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+Loans and advances(Year on year growth)

17%

+Customer deposits(Year on year growth)

19%

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Dear shareholder,

I am proud to present to you Burgan Bank Group’s 36th annual report for the year ending December 31st, 2013. Despite the pressing changes in world political, economic and policy situations, Burgan Bank Group has managed to continue to grow faster than the market and achieve another year of solid underlying growth.

Chairman’s Statement

2013 was a year of courageous decisions for the

group. Firstly, we built on our solid performance

despite complex local and regional operating

environments. We have promised to grow and we

have delivered. Our franchises have sustained an

upward growth trajectory, held under pressure and

proved the viability of our resilient business model.

Our business lines have grown and acquired market

share despite market stagnation, and our operational

efficiency has increased on all levels.

Secondly, as our underlying performance remained

solid amid the complexity faced the regional

operating environment, we took the decision to

protect our intelligent growth by accelerating our

reserves build-up out of prudence and to further

enhance our asset quality. The decision to build a

strong war chest against unforeseen circumstances

stemming from the volatility of the markets, led us

to book KD 52.6 million in precautionary reserves in

2013; a step that is highly encouraged by the Central

Bank of Kuwait.

As a result of this decision, our coverage ratio

has increased to reach 256% and our reserves

outstanding in 2013 reached KD232.5 million. Our

non-performing assets ratio net of collateral to gross

facilities reached 1.6%. Our Capital Adequacy ratio at

end of December 2013 reported at 15.4%.

Thirdly, Burgan Bank Group success has definitely left

a noticeable international footprint. As we entered

new markets and expanded our network, our

presence and solid underlying performance has been

picked up by leading international bodies and we

have been recognised as a new emerging leader into

the international arena of financial services.

2013 will definitely be left in our records as another

evidence of the successful execution of our resilient

model, and a building block in reaching our long-

term strategy objectives. We are proud of Burgan

Bank Group and we have come a long way since

the initiation of the youngest commercial bank in

Kuwait. We are now an international Group with five

subsidiaries and one of the largest regional branch

networks with more than 231 branches across eight

countries.

Corporate Social Responsibility

Burgan Bank prides itself in its intensive Corporate

Social Responsibility programs and diligent activities.

High standards of social responsibility are applied on

behalf of the Bank and its employees across different

spectrums to our social, educational, and economic

obligations. Our support and high commitment

to giving back to our communities stems from our

corporate values of trust, progression, excellence, and

commitment; values which are reflected in the way

we conduct business as well.

As with every year, Burgan Bank reaffirms its

commitment to high standards of delivery and 2013

was no different. During 2013, the Bank indulged

in giving back to its community as it hosted a wide

range of activities to promote social progression,

economic advancement, and education. This year’s

activities ranged from a heightened support of

local talents in the Banking industry, to different

initiatives and sponsorships in health and medicine

as well as participation in various cultural and

traditional activities as part of the Bank’s involvement

in its community. The Bank also offered various

educational opportunities to help develop and

educate the youth.

We strongly recognise that the success of any

organisation is a direct result of its ability and strong

commitment to giving back to its stakeholders.

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We consider our community an important part of

our commitments crystallising our strong Corporate

Governance culture, which is adhering to increasingly

higher standards.

I am proud of our efforts during 2013 and in general.

Our aim of contributing to our social, economic, and

educational development and to that of being an

active member of our communities is achieved year

on year as we continue to build on our work and

achieve our ultimate aim of sustainable development.

Way Forward

For 2014, we remain ready to accommodate to

change and external pressures. We have built

a fortress and our leading financial indicators

continue to point to the right direction, our regional

operations remain profitable and contributing

54% to the Group’s revenues. I remain confident

and optimistic of the Group’s strong performance

going forward as we expand, grow, and solidify our

operational arms.

On behalf of the Board of Directors, I would like

to extend my warmest gratitude to you, our

shareholders for your continuous trust and

confidence. I would also, like to thank the exceptional

management and clusters of highly motivated work

force working to push Burgan Bank Group to achieve

multiple successes.

Best regards,

Majed Essa Al-Ajeel

Chairman of the Board

Board of Directors

Mr Majed E. Al AjeelChairman

Mr Mohammed A. Al BisherVice Chairman

H.E. Abdul Kareem A. Al KabaritiBoard Member

Mr Faisal M. Al RadwanBoard Member

Mr Masaud M. J. HayatBoard Member

Mr Samer S. KhanachetBoard Member

Mr Sadoun Abdulla AliBoard Member

Mr Pinak P. MaitraBoard Member

Mr Abdul Salam M. Al BaharBoard Member

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Dear shareholder,

2013 marked yet another good year for Burgan Bank Group. Our core strategy has not changed throughout the year – we have managed to expand on calculated growth plans, adapt to change and remain resilient to a less favourable operating environment and markets volatility.

CEO’s Statement

We were able to keep our promises of growing our

market share in the core market with profitability,

revamping our retail bank, growing our cross

business origination and building capabilities.

2013 did not pass without its share of challenging

situations. Our franchises were influenced by

global and regional volatility driven by economic,

political and social factors. The external pressures

faced and still facing the operating environment

made it difficult for the banks to grow and number

of unfortunate events complicated the sector’s

operating environments and slowed growth. Despite

all that, our underlying performance remained solid

and our formula proven successful. It is only with

the smart and focused execution of our resilient and

adaptable strategy that we were able to deliver on

promises made under much better assumptions; We

pushed hard against these conditions and placed

Burgan Bank in a position that will allow us to protect

such strong underlying performance and continue

with our smart growth plans going forward.

Each franchise continues to perform well and

collectively the growth of the Group confirms the

soundness of a simple well-executed strategy, which

allows us to perform well and deliver even in non-

expansionary cycles.

On a Group level, we managed to maintain a stable

speed of growth in all of our subsidiaries. Our

operational performance is solid and enabling us to

parapet reserves build-up hence strengthening our

asset quality. Reserves outstanding in 2013 reached

KD232.5 million increasing our coverage ratio to

256% while our Non-performing Assets (net of

collateral) ratio declined to 1.6% to gross facilities.

On a consolidated basis, Operating income surged

to KD 254 million registering a growth of 33% while

Operating Profits before provisions soared to register

KD 141 million reflecting a growth of 18.3%. Our

leading indicators are pointing north and as a group,

we remain confident about our ability to create value

to our shareholders.

As a group CEO reflecting on the past three years of

healthy operational performance, I am glad to say

that Burgan Bank Group has gone a long way. We

have managed to almost double our tangible equity

in value if we compute the precautionary reserves.

We have managed to grow market share with

profitability in the core market, We have managed

to smartly enter new markets hence reaping the

benefits of diversifying into higher growth markets,

we have managed to strike the right balance

between risk & returns with pursing calculated

growth plans, effective risk management and internal

controls. Our growth inertia is at a stable pace with

the international operations contributing to 54% of

the Group’s revenues despite challenging operating

environments that are proving to be more complex

and placing added limitations to opportunities and

previous levels of growth.

Kuwait Operations

In Kuwait, our businesses managed to grow

locally and acquire higher market share not only

against heavily gripped and well-established pool

of financial players, but also against number of

nation-wide events and a curb on government

spending that continues to stagnate growth and limit

opportunities. Despite that Kuwait operations have

managed to grow market share under a number of

different initiatives. Firstly, our teams have worked

to introduce new products to our product suite and

supported the current product range through varied

sales and marketing campaigns. The successful mix

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along with a growing sales-force, managed to grow

our loans and deposits books by 17.5% in loans and

23% in deposits, a hefty task to accomplish in such

less favourable operating environment.

Moreover, our retail bank, as promised, has delivered

solid results, a successful initiation of its turnaround

as 2013; making it the year of the return of our

retail operations to profitability. The Retail bank

has contributed 17.5% to the revenue line in 2013

reflecting a change of 52% year on year. Total

number of accounts in 2013 have reached 154,436

accounts with 21% growth year on year. Burgan

Bank’s retail bank has also been awarded “the Best

Domestic Retail Bank of the Year”, By Asian Banking

and Finance Magazine and its brand has been

shortlisted as a top retail banking brand in Kuwait

by the annual “Service hero customer survey”.

I am glad to state that our Kuwait operation is

growing at faster pace than economy and market and

our underlying business is self-funding its growth.

International Operations

2013 also witnessed the initiation of our international

offices. The International Offices are hubs specifically

created to help improve work streaming between

the subsidiaries and thus increasing coordination and

business generation. Two offices were initiated, one

in Turkey, supporting the Private Bank, the other in

Malta, supporting Corporate Trade Finance, factoring

and forfeiting.

In Algeria, although the government has introduced

measures to boost the economy, thus contributing to

falling rates of unemployment and inflation, the

Banking sector, heavily dependent on the influx of

foreign exchange transactions, was hit by the prudent

regulatory changes affecting fees & commissions

generation in Banks. Despite the hit we took in the

second half of the year due to the new regulations,

Gulf Bank Algeria remained profitable and its

capabilities proved highly adaptable and efficient.

In Tunis, the situation saturated with uncertainty

along security concerns, slowed the economic

recovery of the country and dampening growth

projections for 2014. However, Tunis International

Bank has maintained its customer base and its

strong balance sheet.

The worsening situation in Syria has cast its heavy

shadows on the economies of the neighbouring

countries specifically Jordan & Lebanon. The influx

of Syrian refugees heavily affected both countries,

which are struggling to adapt to their needs. Tensions

in Syria are estimated to wipe off big portions of both

economies; it is inevitable the banking sector will

be hit by these worsening conditions. Nevertheless,

Jordan Kuwait Bank maintained the growth mode

and managed to achieve strong recognition on its

performance. Jordan Kuwait Bank has been awarded

in 2013 the “Best Retail Bank in Jordan” and “Best

Private Bank in Jordan” among many other awards

and continues to remain well-poised to face the

external unfortunate situations with minimal

damage to its operations.

In Iraq, Bank of Baghdad’s operations are going

through a restructuring in its attempt to seize

economic opportunities created by shifts in

businesses influx from highly affected areas of Syria,

Lebanon, and Jordan to Iraq. And although the

operating environment remains highly challenging,

Bank of Baghdad is regarded as of high potential

due to its strong local position as a doorway to the

growing Iraqi financial sector. Bank of Baghdad is a

franchise at the earliest stages in its development

yet remains profitable and ranks first among private

banks operating in Iraq and the only bank with a

presence in the 18 governorates.

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In Turkey, the process of integration of Burgan

Bank Turkey within the Group keeps creating high

opportunities of business generation between not only

Turkey and Kuwait, but also the rest of the Group. It is

unfortunate that the volatility of the Turkish market

have slowed the economic growth and is posing some

risks. However, we do believe that there is a huge

potential in the Turkish economy both on a local level

and in terms of inter-group business origination.

Burgan Bank Turkey and subsidiaries (Burgan Leasing

& Burgan Securities) managed to undertake internal

restructuring and started growing from the second

half of year. Additionally, the new promising

management is now in place to better position the

operations for the way forward.

The Brand

During 2013, Burgan Bank’s performance has been

recognised both internationally and locally. The

Burgan Bank brand rating has been re-affirmed as AA

with a positive outlook making it the highest rated

banking brand in Kuwait. Burgan Bank brand value

has increased to USD 234 million compared to last

year’s value that reached $199 million. Burgan Bank’s

brand ranking has jumped 43 positions in the top 500

league of banking brands worldwide. Burgan Bank

also acquired a number of international awards that

are the results of “Peers & customers” voting process

by renowned industry experts such as “Best Banking

Group MENA 2013” by Global Banking & Finance

Review and “Best Banking Group in Kuwait”, by World

Finance and “Best Private Bank in Kuwait 2013” By

Capital Finance International.

Closure on 2013

During 2013, I am confident to say that almost all

aspects of our performance scorecard look strong:

• Inertia: 33% Growth of revenues & operating

income. A growth pace that is well ahead of

economic and market growth clubbed with leading

indicators growing faster (loans & deposits) and

winning market share in a steady way.

• Risks: Reasonable stock of risks with continuous

asset quality improvements (declining NPAs) .

Minimal market risks and consistent conservative

liquidity management.

• Strategic Progress: Good progress in diversifying

risk and revenue sources. International operations in

faster growth markets contributing 54% to group’s

revenues.

Way forward

As we enter 2014, we will continue in the same path as

the last three years; a focus on intelligent growth and

execution. We aim at strengthening our efforts to

integrate our Group’s arms and to maximise efficiencies

utilising our capabilities to the best possible ways. We

also aim to adapt to new capital regulations, particularly

those of Basel III efficiently while protecting and

balancing our growth inertia. We will ensure that our

capital and funding mix remain adequate. We will

continue to focus on diversifying and growing our

portfolio while as we renew our pledge of optimising

risk and return balance.

Burgan Bank is well positioned for smart growth, for

the benefit of our shareholders, our customers, our

employees and our communities.

Sincerely,

Eduardo Eguren

Group Chief Executive Officer

The Burgan Bank brand value has increased to USD 234 million compared to last year’s value that reached $199 million. Burgan Bank’s brand ranking has jumped 43 positions in the top 500 league of banking brands worldwide.

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Review of the Year – Kuwait Operations

Corporate Banking

Corporate Banking remains a powerful driving force

in Kuwait operations. During 2013, the Corporate

Banking team continued to expand its performance

during stagnant operating conditions and in an

already saturated and highly competitive market.

Corporate Banking enhanced its performance by

expanding its client base and intensifying its revenue

efforts. Revenues from the Corporate Banking group

grew by 11.7% year on year thus increasing their

underlying contribution by 4.5% to reach 79% in

the underlying performance of Kuwait for the same

period. In addition, the Corporate Banking group has

engaged on many fronts locally and internationally

across all sectors.

Corporate Banking has managed to finance

government projects worth KD 571.5 million.

These projects are under different sectors such as

construction, maintenance, infrastructure, services,

oil, marine and real estate development.

Internationally, Corporate Banking has been very

active in fortifying intergroup business generation,

working hand in hand with regional subsidiaries

to finance projects in Turkey, India, Jordan and

the UAE thus enhancing intergroup abilities and

synchronisation.

Financial Institutions

The Financial Institution Division activities during

2013 focused on increasing and enhancing

syndicated loan participation and trading, banking

and other financial institutions transactions.

Loan Syndications & Trading: Additional assets

sourced in primary and secondary of nearly US$320

million were added to the loan portfolio and included

new markets such as Brazil, Panama and South Africa

whereby Burgan Bank participated as a mandated

lead arranger in primary syndication.

Banking: Additional unfunded trade risk

participations of nearly US$350 million were added

to the portfolio on South East Asia, India, GCC and

Turkey. Financial Institution Division also assisted

subsidiary banks in Iraq and Turkey with Trade

issuances and purchased secondary risk of JKB and

AGB in addition to providing leads for Guarantee

issuances into Iraq by Bank of Baghdad for a total of

US$65 million. During 2013, the Division arranged

facilities for more than 150 Banks globally thus

enhancing Burgan Bank’s trade finance offering to

Kuwaiti exporters.

Non-Banking Financial Institutions: Participated

in syndications to the favour of the Oil & Gas sector,

both locally and abroad, in addition to granting new

facilities for the Investment and Insurance sectors

in Kuwait. The division also added new liabilities of

more than KD 50 million to improve liquidity profile

of Burgan Bank.

Kuwait operations have performed remarkably in highly challenging conditions working on further elevating performance, growth and acquiring market share, and intergroup business generation thus contributing to higher revenues overall, ensuring profitability for 2013 as well as beating market performance.

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Treasury

During 2013, Burgan Bank’s Treasury actively worked

to increase its clients and deals and introduce new

products and services. On the FX front, a new

integrated trading platform was launched and

successfully rolled out to Group members (Jordan

Kuwait Bank, Tunis International Bank, and Burgan

Bank Turkey) enabling easy integration and execution

speed. The Division also focused on increasing sales

and performance which resulted in a successful rise

of number of FX transactions by 32% year on year as

well as a rise of 15.49% in interbank volume trading

over 2012. Treasury also worked hand in hand with

other departments to introduce new products.

During 2013, Ladder Time Deposits was launched

for Premier Clients: A deposit with flexible terms

which allows customers to gain higher interest rates

with time while remaining flexible and liquid. The

FX Desk has also concluded a series of successful

arbitrage deals, advisory services to transactions, and

intergroup and interdepartmental related initiatives.

Private Banking

Burgan Bank prides itself on having an award winning,

experienced, and highly dedicated Private Banking

team. Private Banking at Burgan provides personalised

financial solutions tailored to clientele needs. During

2013, the Division managed to deliver a strong

performance with business volume reaching a soaring

KD1 billion for the first time since its establishment

14 years ago. The business is supported by an array

of expanding and evolving services and products

catering to various financial needs. Private Banking

yielded a 51.2% rise in department revenue year on

year, contributing a rise of 12.6% to the underlying

performance of Kuwait operations.

The department also played on the expanding

synergies between subsidiaries thus launching

an International Desk operating between Burgan

Bank Kuwait and Turkey and focusing on enhancing

business generation while catering to clientele from

both markets.

Private Banking’s excellent performance and high

standards have been awarded “Best Private Banking

in Kuwait” for the third consecutive year.

Retail Banking

2013 was marked a great milestone for Retail

Banking. The Division has delivered solid results, a

successful initiation of its turnaround in 2013; making

it the year of the return of our retail operations to

profitability. Retail Banking has contributed 17.5%

to the revenue line in 2013 reflecting a change of

52% year on year. Total number of accounts in 2013

have reached 154,436 accounts with 21% growth for

the same period. Burgan Bank’s retail bank has also

been awarded “the Best Domestic Retail Bank of the

Year”, By Asian Banking and Finance Magazine and

its brand has been shortlisted as a top retail banking

brand in Kuwait by the annual “Service hero customer

survey” in recognition of its efforts and achievements.

16

Corporate Social Responsibility – 2013 Report

Social contribution

Ramadan and Gergean Festival –

‘Creating memories that last a lifetime’

Every year Burgan Bank hosts community events

during the holy month of Ramadan that aim at

nurturing its holy spirit while giving back to the

community as well as to those in need. During

Ramadan 2013 the bank focused on hosting a range

of Gergean themed events for Kuwaiti children and

their families in a number of venues.

Burgan Bank celebrated the joyful mood of Girgi’an

through a fun filled activities with the participation

of the Kuwait Handicapped Sports Club, the Kuwaiti

Society for Guardians of the Disabled, Abeer 2

Voluntary Team, and the Psychological Health Center

Kuwait. The bank’s team was also present with the

Ministry of Social Affairs and Labor – Patient Care

Services, where the team visited the elderly, special

needs as well as orphans, and distributed Girgi’an

gift bags while also sharing special moments of these

celebrations, which are considered as one of the most

popular Ramadan traditions in Kuwait.

Supporting the Kuwait Association for the Care

of Children in Hospital’s activities – ‘Tradition built

on supporting humanitarian efforts’

Burgan Bank reiterated its commitment to the

community by rendering its support to the Kuwait

Association for Care of Children in Hospitals (KACCH).

This is an ongoing commitment which is now in its

12th year. Supporting healthcare initiatives has been

an integral part of Burgan Bank’s Corporate Social

Responsibility framework and Corporate Citizenship

program, Burgan Bank is proud to be a benefactor

towards such leading medical projects, and KAACH’s

humane initiatives.

Over the past 12 years, Burgan Bank’s continual

contributions have helped support the development

of healthcare and paediatric facilities in several

hospitals which are part of the KACCH, often helping

children and their families fund treatment and

recovery from fatal and terminal illnesses, as well as

providing entertainment.

Summer Training Program – ‘Providing avenues

for the growth of its youth’

Burgan Bank’s annual summer training program

for talented young students was initiated in 2011.

The Summer Training Program has been tailored to

provide students with a head start in meeting the

challenges that lie ahead in their fledgling careers

in the world of banking and finance. Along with

gaining invaluable, hands-on experience through the

assistance of various seasoned finance professionals

at both the Head Office and branches, the Bank also

offered classroom-training programs to increase

students’ knowledge and practical experience.

National Celebrations – ‘Imprinting nationalism

throughout Kuwait’

Reflecting its deep sense of belonging to the Kuwaiti

community, Burgan Bank celebrated Kuwait’s

signature national days by taking part of a number of

activities to mark the State of Kuwait’s national spirit.

Event attendees were provided with gifts to mark the

national celebration.

2nd Youth Banking Conference by Kuwait

University – ‘Successful business model moulds

young bankers’

Burgan Bank sponsored the Second Youth Banking

Conference organised by Kuwait University’s College

of Social Sciences where in Mr. Majed Essa Al-Ajeel

Burgan Bank’s overall approach to Corporate Social Responsibility (CSR) begins with a key element; that, as a Kuwaiti company, its brand name, values and work ethics should be on par with the necessities of the Kuwaiti society and with those of the people who rely on the bank.

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discussed the importance of integrating the Kuwaiti

youth in the Kuwaiti banking sector, and providing

robust opportunities that held define their career

path in a wide range of fields within the sector.

The Banking Conference is the first leading

conference in the State of Kuwait that targets the

youth of the society. Amongst its main goals is to

introduce the varying banking options on a local

level, to raise awareness about the banking sector in

the country, and to develop an understanding of the

banking system and the methods utilised.

Corporate

Burgan Bank’s prudent execution of the group

strategy and successful business model has continued

to yield good underlying performance across the

markets in which it operates from. Backed by a

committed workforce, leading financial indicators still

point to the right direction and continue to position

the Group for smart growth.

Investor Relations – Shafafiya 2013 –

‘Forging strong trust through transparency’

Burgan Bank held its annual Al Shafafiya Investor’s

forum following the bank’s annual general assembly

meetings, in which members of the board presented

Burgan Bank’s financial earnings report for the year

ended December 31, 2012 and agreed to a payout of

10 fils as cash dividends while also distributing bonus

shares of 5% to registered shareholders.

The new elected board for the next period running

three years was announced where it was also agreed

on re-electing Mr. Majed Essa Ahmad Al-Ajeel as

Chairman while Mr. Mohammed Abdulrahman Bishr

Albishr was elected again as Vice Chairman.

The Shafafiya Forum is an annual event that is

held amongst Kuwait Projects Company’s (KIPCO)

subsidiaries, and reflects a strong corporate

governance practice, which promotes corporate

fairness, transparency and accountability. The forum

provides an ideal gate to discuss financial reports

and outlook as well as market predictions openly

with shareholders.

Awards – ‘Operational Excellence as a driving

force for the Brand Group’

Excellence is one of the Bank’s four key values and

Burgan Bank continually strives to maintain the

highest standards in the industry. The Bank was

certified in 2013 with the ISO 27001 certification

in all its banking businesses, making it the first bank

in the GCC, and the only bank in Kuwait to receive

such accreditation.

The year 2013 was a rewarding period for the bank as

a group on both a local and regional front as Burgan

Bank Group was named ‘MENA – Bank of the Year’

by Acquisition Finance Magazine and “Best Banking

Group in MENA” for the second consecutive year by

Global Banking and Finance Review. The bank also

won the coveted ‘Best Domestic Retail Bank of the

Year’ award from the Asian Banking and Finance

Magazine. Moreover, Burgan Bank also picked up the

“Best Private Bank in Kuwait” for the 3rd consecutive

year by Capital Finance International followed by the

“Best Employee Development in GCC” award from

World Finance. Thereby, serving as a testament to the

Group’s successful banking operations and strongly

positioned regional presence in the MENAT region.

Furthermore, Brand Finance, an affiliate of the

prestigious international financial publication “The

Banker” had re-affirmed Burgan Bank brand rating

The Annual Al Shafafiya Investors forumAnnual Gergean Festival

18

as AA with a positive outlook and declared Burgan

Bank as the only bank in Kuwait that witnessed an

increase in its total brand value, which came at $199

million compared to $175 million in 2012.

Corporate Governance

Burgan Bank is strongly committed to the

maintenance of a solid Corporate Governance

structure practice and framework.

The Bank’s Board has a responsibility to protect

and enhance the value of the Group in the interests

of both shareholders and the Group. The Board is

the overall and final body for all decision-making

within the Bank. The governance practice at Burgan

Bank has been designed to ensure that the bank

is effectively managed and that financial industry

standards and the Kuwait Stock Exchange and

Central Bank statutory obligations are met.

The governance framework, which is underpinned

by the Corporate Governance Manual and policies,

clearly delineates the separate roles of the Board and

bank management. The Board’s Audit Committee

monitors developments in the governance area

and updates its governance practices to ensure

that Burgan Bank continues to maintain the most

appropriate standards of governance.

Since 2007, Burgan Bank has been recognised by

the Hawkamah Institute for Corporate Governance

as one of the leading banks in the MENA region

for the implementation of best practice corporate

governance methodologies.

Performance Culture

Burgan Bank strives to create a culture that is

customer focused, collaborative and growth

oriented. This culture is an integral part of daily

work and a key component in recruitment, selection,

learning and development and the performance

evaluation of employees and contractors.

Burgan Bank aims to build a competitive advantage

by enabling employees to realise their potential and

that of their teams and to nurture and aid the growth

of potential leaders. For that, the bank offers a range

of initiatives to develop employees and strengthen

its workforce capability.

Personal performance and contribution are

promoted at Burgan Bank. Every employee has

personal performance objectives that align to the

Bank’s strategic direction and reflect the culture

of respect and care for customers and support

for our community.

Kuwaitisation percentage increasing to 68.4% –

‘Investing in local potential’

Burgan Bank, in 2013, has achieved a Kuwaitisation

percentage level of 68.4% across its workforce with

the recruitment of over 80 new Kuwaiti employees

by Burgan Bank since the beginning of 2012. The

recruits work across the Bank’s operations including

the Retail, Operations, and Risk Departments.

This is a significant accomplishment for the Bank, in

which it has consistently worked towards achieving

its long-term strategic objectives of nurturing

the best talent local talent, while also investing in

Burgan Bank’s annual summer training program

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community initiatives that aim at encouraging young

people to join the banking sector thus not only

supporting those individual’s growth and careers

but also enhancing the local financial community

as a whole.

By investing in the Kuwaiti youth and talent, the Bank

continues to align itself with the developmental goals

of the country. Over the years, the rise in calibre of

local talent has continued to improve and impress

different segments of our organisation, thus, by

joining the Burgan Bank workforce, those potential

candidates will receive the required expertise to

become future leaders across the banking sector in

specific and the financial, business, and economic

industries in general.

Consumer Affairs

Burgan Bank’s support to the wider community is

of paramount importance across its daily work. As

one of the leading local as well as regional financial

institutions, the Bank caters for different segments

in the society to be able to tell their unheard stories

and showcase their creative talents.

Visit to Nusaiba Bint Kaab Middle School for girls

– ‘Turning a new chapter in Education’

Burgan Bank visited Nusaiba Bint Kaab Middle School

for Girls where in the team focused on highlighting

the importance of saving, as part of the ‘save week’

event and various approaches on money saving

methods while also providing additional tools to help

students and attendees reach their savings goals

as part of a wider initiative to spread financial and

economic education in the community.

The visit also comes as part of the bank’s education

program that targets different schools around Kuwait

and Burgan Bank’s commitment to developing

and executing best practice methods of social

responsibility, a core component of its Corporate

Governance framework that has paved the way

for the bank to attain prominent accolades which

demonstrate its leading position.

‘Express Your Love to Kuwait’ painting

competition –‘Drawn to enhancing little

audiences creativity’

Uniting all the BuBa Kids account holders, Burgan

Bank held a nationwide competition ‘Express

your love to Kuwait’ to showcase creativity and

originality in spirit of the national celebrations for the

independence of Kuwait.

The competition gathered all the BuBa kids account

holders as part of the bank’s to nurture its little

customers with pride for their own country while

incorporating elements of fun.

Gulf Jazz Festival – ‘Tuning Kuwait’s art and

multi-cultural landscape’

From the aspect of advocating the spread of cultural

enrichment and enhancing communities through

innovative initiatives, Burgan Bank sponsored the

prestigious annual Gulf Jazz Festival at the Radisson

Blu Hotel which included a lineup of performances

by world legend American Trumpet player and

flugelhornist Randy Brecker, Italian Jazz pianist

Roberto Magris Trio with Italian pop singer

Maria Dal Rovere and a quartet of young jazz

musicians – High Definition.

Nusaiba Bint Kaab school visitBID Awards

20

World renowned ‘Seussical, The Musical’

– ‘Improving international standards for all

segments’

Burgan Bank sponsored the fun packed musical that

takes a journey through the world of Dr. Seuss at the

live theatre in Discovery mall that was performed by

Staged in Kuwait “SIK”, a non-profit organisation that

is committed to showcasing the highest standards

of English Language theatre for all ages.

Indian Doctors Forum – ‘Weaving the social fabric

of Kuwait through Educational initiatives’

Burgan Bank was honoured by the Indian Doctors

Forum for its endorsement to launching the 2013

Health Guide for the 2nd consecutive year. Burgan

Bank’s support is in line with its efforts to spread

more health education and medical information

to the community. This year, the health guide had

been published with a fundamental theme of raising

more awareness on the dangers of obesity.

Burgan Bank is fully committed to organisations

and associations such as the Indian Doctors Forum,

which reflects its role as a socially responsible

Kuwaiti leading financial institution.

Employee relations

Jet Ski USA World Finals – ‘Encouraging personal

development of its employees’

The Youth Account from Burgan Bank sponsored the

Bank’s employee - AbdulWahab Al Essa, at Jet Ski

USA World Finals in Arizona in October. The initiative

is in line with the bank’s comprehensive approach

of employee engagement, which aims to nurture

a culture of mutual support, harnessing skills, and

creating credible brand ambassadors.

International Women’s Day –

‘Honouring National talent’

An integral part of Burgan Bank’s mission for the

Kuwaiti community is to recognise and demonstrate

its appreciation for cultural efforts towards national

growth and development in different aspects.

To that effect, Burgan Bank celebrated International

Women’s day at the Chairman’s Club to honour

women of different statures for their unique

contributions as a whole.

Representing this special occasion amongst the

Burgan Bank staff and Kuwait Projects Company

(KIPCO) personnel were Eman Oraiqat, Chief of

Mission International Organisation for Migration in

Kuwait, Loluwa and Balsam Al-Ayoub, International

Championship Fencers, Dr. Rola Dashti, Minister of

State for Planning & Development Affairs, Dalal Al-

Ghanim, General Manager at Chairman’s Club,

as well as Maha Al-Baghli, Chairwoman of Business

and Professional Women Club – Kuwait.

Town Hall Gathering – ‘Banking on its Employees’

Employee communications is a core component of

Burgan Bank’s overall approach wherein the bank

invests in its internal audiences with the aim of

nurturing a culture of open dialogue, harnessing

skills, and creating credible brand ambassadors.

Burgan Bank held its yearly gathering event at

the Salwa Sabah Al Ahmad Al Sabah hall and was

attended by Burgan Bank’s Chairman, Mr. Majed

Essa Al-Ajeel, staff members, senior executive

management, as well as representatives from

the Bank’s regional subsidiaries. Employees were

engaged by receiving latest updates on the bank’s

KIPCO media dinnerBurgan Bank honorary ceremony by the Indian Doctors Forum 2013

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strategic objectives by the CEO along with the key

highlights of the bank’s performance over the course

of the year 2012 and general direction for the future.

Burgan Bank Group now includes more than 3,000

employees operating through a wide network of

220 branches across the MENA region in addition

to Turkey, all whom are the driving force of the

bank’s business.

World Diabetes Day – ‘Internal integration

of Global cause’

Burgan Bank’s continued development of its

overall social responsibility framework entails local

community initiatives and emphasises on a strong

internal corporate culture. Marking the World

Diabetes Day on its premise, in collaboration with

Al Seef hospital, the Bank’s objective was to create

awareness around the dangers of the disease.

Employees received free tests to gauge their current

blood sugar level, understand what the current

risk of getting the disease is and how to avoid

becoming diabetic .

Support Dasman Diabetes Institute’s “Let’s Get

Healthy Today, Kuwait!” Program – ‘Ensuring a

wholesome future’

In an effort to further enrich the country’s future,

Burgan Bank employees participated in Dasman

Diabetes Institute’s “Let’s Get Healthy Today,

Kuwait!” initiative that engaged more than 60

participants across a series of interactive sessions with

nutritionists, diabetes specialists, physical trainers,

and chefs. The program aimed at educating children,

as well as school teachers and administrators, about

the early prevention of diabetes and the importance

of leading a healthy lifestyle.

Burgan Town Hall

Media Relations

KIPCO Media Dinner – ‘Demonstration of

gratitude to an integral stakeholder’

As part of its Media Relations activities and by its

belief in the importance of the Media role in Society,

KIPCO hosted a media gathering and dinner in 2013

on behalf of its operating companies to thank the

media and acknowledge their efforts, support and

role in the society.

The media event was attended by the local

media. Burgan Bank as a subsidiary of KIPCO was

represented by its Corporate Communications team

and maintains an on-going dialogue with both local

and regional media. Apart from which the bank

conducted periodical visits to publication houses to

gain an in-depth understanding and thank the local

media landscape.

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Corporate Governance and Disclosures

The Board has adopted a comprehensive framework of Corporate Governance Guidelines, designed to properly balance performance and conformance. This enables the Bank to undertake, in an effective manner, the prudent risk-taking activities which are the basis of its business.

Board of Directors

The Bank is steered by an effective and unitary Board which assumes responsibility for its leadership and control and is collectively responsible for promoting Bank’s long-term success by directing and supervising its affairs. The Directors are responsible for ensuring that the Board makes decisions objectively in fulfilling the Bank’s public and corporate responsibilities.

The Board shall have overall responsibility for the Bank, including approving and overseeing the implementation of the Bank’s strategic objectives, risk strategy, corporate governance and corporate values. The Board shall also be responsible for providing oversight of the Executive Management.

The Board comprises of non-executive Directors, as elected by the General Assembly, and will ensure independence in actions and decisions at all times. The Board shall comprise of sufficient number of members to allow it to form the required number of Board Sub-Committees.

Election and renewal of the Board membership shall be done in compliance with the applicable rules and regulations. The changes related to the number of Board members of the Bank shall be suitably reflected through amendments in the Articles of Association to correspond to the implementation of the rules, regulations and instructions.

Each member of the Board shall serve a term of three years, at the end of which the Board shall be formed again and it shall be permissible to appoint the members whose term has expired.

The Board adopts a formal induction program to familiarise with the Bank’s operations and activities. The Board is conscious of its obligations to regulators

and shareholders and is committed to ongoing training and attendance at relevant conferences and seminars. Only by continuing to keep abreast of issues that have an impact on the business can the Board fulfil its responsibilities.

The Board holds at least (6) meetings annually upon an invitation from the Chairman, the Board also holds meetings if requested by at least three of its members, the Board meeting shall be valid only if attended by the majority of the Board members, board meetings could be held using the modern communication means, during 2013, Board held (31*) meetings. The following table shows the Board Members attendance of the Board of Directors meetings, the table shows a high degree of commitment of each member in attending the Board of Directors’ meetings:

Board Members No. of meetings attended (2013)

1 Mr. Majed E. Al Ajeel 31

2 Mr. Mohammed A. Al Bisher 27

3 H.E. Abdul Kareem A. Al Kabariti 25

4 Mr. Faisal M. Al Radwan 29

5 Mr. Masaud M. J. Hayat 19

6 Mr. Samer S. Khanachet 28

7 Mr. Sadoun Abdulla Ali 28

8 Mr. Pinak P. Maitra 28

9 Mr. AbdulSalam M. Al Bahar 29

* out of which (21) by circulation.

Burgan Bank Board comprises of (9) Non-Executive members, the following paragraphs show information on the current members of the Board for the current term (2013 - 2015) who were elected members of the Board for this term with effect from April 1, 2013. The information includes the year in which they were born, the year in which their term as Board Members expires, their qualifications and their principal business activities outside our Bank.

22

This introduction outlines the key aspects of the Bank’s corporate governance framework. The Board has consistently placed great importance on good corporate governance practices of the Bank, which it believes is vital to the Bank’s well-being.

Information presented in this Corporate Governance Report is shown as of Dec. 31, 2013.

23

1 Mr. Majed E. Al Ajeel (Chairman)

Year of Birth 1953Appointed 2013Term expires 2015Has been with Burgan Bank since 2007Studied in The United States of AmericaUniversity Catholic University of AmericaDegree Bachelors - Science in Architecture Masters in PlanningGraduated in Bachelors - 1977 Masters - 1978

Past Positions (date & details) • ViceChairmanandCEO-UnitedProjectsCo.

(from 12/04/2010 - 03/07/2012)• ChairmanandCEO-UnitedProjectsCo.

(27/10/2004 - 12/04/2010) • BoardMember-Kuwait&MiddleEastFinancial

Investment Company (1984 - 1986) • BoardMember-KuwaitRealEstateInvestment

Consortium (1985 - 1992) • BoardMember-InternationalLeasing&

Investment Co. (1999 - 2003)• ManagingDirector-KuwaitFinance&

Investment Company (KFIC) (2002 - 2004)• BoardMember-BurganBank(1998-2004)Current Positions • BoardMember-BurganBank(2007-present)• DeputyChairman-KuwaitBankingAssociation• BoardMember-InstituteofBankingStudies• BoardMember-BurganBankTurkey• BoardMember-FIMBank-Malta• BoardMember-UnitedProjectsCo.

2 Mr. Mohammed A. Al Bisher (Vice Chairman)

Year of Birth 1948Appointed 2013Term expires 2015Has been with Burgan Bank since 2010Studied in KuwaitUniversity Kuwait University

Degree Bachelors - Economics & Political ScienceGraduated in 1971

Past Positions (date & details) • BoardMember-JordanKuwaitBank

(1981 - 1989).• BoardMember-KuwaitInternational

Investment Company (1983-2000)• BoardMember-KuwaitClearingCompany

(1986 - 1992).

Current Positions• BoardMember-BurganBank(2010-present)• DirectorandPartnerofAbdulrahmanAl-Bisher

& Zaid Al- Kazemi Group• DirectorofAl-BisherSon›sGroupforGeneral

Trading & Contracting• DirectorofEtemadcoExchangeCompany.• DirectorandPartnerofInternationalOptics

Kuwait• ChairmanofLeoWitterGmbH(Jewellery

& Precious Mineral Kuwait) .• ServesasaRepresentativeforATAInvestment

Company ( Turkey) and Partner of a group of Saudi Arabia Companies.

3 H.E. Abdul Kareem A. Al Kabariti

Year of Birth 1949Appointed 2013Term expires 2015Has been with Burgan Bank since 2004Studied in The United States of AmericaUniversity St. Edwards UniversityDegree Bachelors - Business & FinanceGraduated in 1973

Past Positions (date & details)• MemberoftheJordanianSenate,Headofthe

Economics & Finance Committee (2005 - 2007).• MemberoftheJordanianSenate,FirstDeputy

to the Speaker (2000 - 2002).• ChiefoftheRoyalCourt,(1999-2000).• MemberoftheEleventhandtheTwelfth

Jordanian Parliaments (1989 - 1993) and (1993 - 1997) / Head of the Economics & Finance Committee (1993 - 1995).

• PrimeMinister,MinisterofForeignAffairsandMinister of Defense (1996 - 1997).

2424

• MinisterofForeignAffairs(1995-1996).• MinisterofLabor(1991-1993).• MinisterofTourism(1989-1991).Current Positions• BoardMember-BurganBank-(2004-Present)• ChairmanoftheBoardofTrustees,Al-Ahliyya

Amman University.• Chairman,UnitedFinancialInvestmentsCompany.• Chairman,AlgeriaGulfBank-Algeria• BoardMember,JordanDairyCompany.• Chairman,JordanKuwaitBank-Jordan

4 Mr. Faisal M. Al Radwan

Year of Birth 1944Appointed 2013Term expires 2015Has been with Burgan Bank since 2010Studied in Egypt - CairoUniversity Cairo UniversityDegree Bachelors - Commerce & Business AdministrationGraduated in 1970

Past Positions (date & details)• DeputyGeneralManager-NationalBank

of Kuwait (1978 - 1980)• GeneralManager-NationalBankofKuwait

(1980 - 1983)• DeputyChiefExecutiveOfficer-National

Bank of Kuwait (1983 - 1993)• BoardMember-BankofBahrain&Kuwait

(1986 to march 1994) • ViceChairman-BankofBahrain&Kuwait

(1991-1994)• BoardMember-BankofOmanBahrain&

Kuwait (1990 - 1994) • BoardMember-BurganBank(2001-2003)• ViceChairman&ManagingDirector-Burgan

Bank (2003 - 2004)Current Positions• BoardMember-BurganBank(2010-present)• BoardMember-BurganBankTurkey

5 Mr. Masaud M. J. Hayat

Year of Birth 1953Appointed 2013Term expires 2015Has been with Burgan Bank since 2013Studied in Kuwait University Kuwait UniversityDegree Bachelors - Commerce & Business Administration Diploma - Institute of Banking Studies

Graduated in Bachelors - 1973 Diploma - 1975

Past Positions (date & details)• Al-AhliBankofKuwait-(April1974-Dec.1996)

I. Operation & Local / International Credit 1974II. Deputy Chief General Manager 1992III. Advisor to the Board of Director 1993

• BoardMember(BIAT)Tunis(1989-1995)• BoardMember-BankofBahrain&Kuwait

(1986 - 1988 and from 1991 to 1995)• BoardMemberIndustrialInvestmentCo.

(1993 - 2001)• BoardMemberGulfInsuranceCo.(1997-2001)• BoardMemberUnitedFisheriesCo.(1997-2001)• BoardMemberTheInternationalInvestor

(2005 - 2009)• ChairmanKAMCO(1998-2010)• ManagingDirectorUnitedGulfBank

(1997 - 2009)• BoardMemberWataniyaAlgeria(1997-2009)• ChairmanUnitedGulfFinancialServicesCo.

(1997 - 2009)• BoardMember&BoardSecretaryUnion

of Investment Companies (1997 - 2009)• ManagingDirector-BurganBank-(2009-2010)Current Positions• BoardMember-BurganBank(2013-Present)• CEO-BankingSector-KuwaitProjectsCo.

“Holding”• ChairmanUnitedGulfBank-Bahrain• Chairman-TunisInternationalBank-Tunis• BoardMemberJordanKuwaitBank-Jordan• DeputyChairman-AlgeriaGulfBank-Algeria• DeputyChairman-BankofBaghdad• DeputyChairman-FIMBank-Malta• ViceChairman-NorthAfricaHoldingCo.• ViceChairman-TheRoyalCapitalGroup

- Abu Dhabi• ChairmanSyriaGulfBank-Syria• BoardMember-KAMCO• BoardMember-MashareaAlKhair

6 Mr. Samer S. Khanachet

Year of Birth 1951Appointed 2013Term expires 2015Has been with Burgan Bank since 2011Studied in The United States of America

University Massachusetts Institute of Technology

Harvard UniversityDegree Masters - Business Administration (Harvard) Bachelors - Science - Chemical Engineering & Science ManagementGraduated in Bachelors - 1973 Masters - 1975

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Past Positions (date & details)• 1975-1980TheIndustrialBankofKuwait

i. Financial Analyst ii. Senior Financial Analyst iii. Assistant Manager

• DeputyCEO-SharjahGroup(1980-1990)• GeneralManager-KIPCO(1990-1995)• CEO-UnitedGulfManagement(1991-2007)• GCOO-KIPCO(2008-Present)Current Positions• BoardMember-BurganBank(2011-Present)• BoardMember-UnitedGulfBank-Bahrain• ChairmanoftheBoard-TAKAUDSaving&Pensions• BoardMember-UnitedRealEstateCo.• MemberofCorporationDevelopment

Committee - Massachusetts Institute of Technology

7 Mr. Sadoun Abdulla Ali

Year of Birth 1961Appointed 2013Term expires 2015Has been with Burgan Bank since 2004Studied in The United States of AmericaUniversity Ashland UniversityDegree Bachelors - Management of Financial & Accounting ServicesGraduated in 1988

Past Positions (date & details)• BoardMember-BankofKuwaitandthe

Middle East (2003 - 2004)• ExecutiveManagement-HeadofAccounting

and Financial Group - KIPCO (1997 - 2006)• GeneralManager-KAMCO(2006-2008)• ChiefExecutiveOfficer-KAMCO(2008-2010)• ManagingDirector&ChiefExecutiveOfficer

- KAMCO (2010 - 2012)Current Positions• BoardMember-BurganBank(2004-Present)• BoardMember-BankofBaghdad• ViceChairman&ChiefExecutiveOfficer

- Qurain Petrochemical Company• BoardMember-UnitedIndustriesCompany• BoardMember-AdvancedTechnologyCompany• Chairman-UnitedOilProjectsCompany

8 Mr. Pinak P. Maitra

Year of Birth 1958Appointed 2013Term expires 2015Has been with Burgan Bank since 2010Studied in IndiaUniversity Osmania UniversityDegree Bachelors - CommerceGraduated in 1979

Past Positions (date & details)• VicePresident-FinancialControlandPlanning

- United Gulf Bank - Bahrain, (June - 1988 - October 1988)

• AssistantVicePresidentofPlanningandFinancial Control - KIPCO (1988 - 1990)

• VicePresident,FinancialController-United Gulf Management Inc. (1991 - 1996)

Current Positions• BoardMember-BurganBank(2010-Present)• GroupChiefFinancialOfficer-KIPCO(1996

- Present)• BoardMember-OSN(PantherMediaGroup

Limited) (2009 - Present)• BoardMember-PulsarKnowledgeCenter

(2003 - Present)

9 Mr. AbdulSalam M. Al Bahar

Year of Birth 1965Appointed in Burgan 2013Term expires 2015Has been with Burgan Bank since 2004Studied in The United States of AmericaUniversity Fairleigh Dickinson UniversityDegree Bachelors - Science - Electrical EngineeringGraduated in 1988

Past Positions (date & details)• BoardMember-TunisInternationalBank

(1997 - 1999)• BoardMember-BahrainMiddleEastBank

(1998 - 1999)• BoardMember-WataniyaTelecom

(1998 - 2007)• BoardMember-KuwaitCateringCompany

(1997 - 1999)• ChairmanoftheBoard-KuwaitCateringCo.

(1999 - 2001)• BoardMember-KuwaitCateringCompany

(2001 - 2003)• BoardMember-TamdeenGroup(2003-2006)• BoardMember-WataniyaAirways

(2006 -2007)• Chairman&ManagingDirector-Wataniya

Airways (2007 - 2011)• ExecutiveManagement-Companies

Financing - KIPCO -(1995 - 2007)Current Positions• BoardMember-BurganBank-(2004-Present)• GeneralManager-OverLandRealEstate

Company - (2012 - Present)• BoardMember-UnitedIndustriesCompany

2012 - Present

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Delegation of authority

The board retains effective control through its governance framework that provides for delegation of authority. In discharging its duties, the Board delegates some authorities to relevant Board Sub-Committees with clearly defined mandates and authorities, although the board retains its accountability.

Board Sub-Committees facilitate the discharge of Board responsibilities and provide in-depth focus on specific areas. Each Committee has a mandate, which the board reviews at least annually. Each mandate sets out the role, responsibilities, scope of authority, composition, terms of reference and procedures.

Board Sub-Committees

The Board has established the following Board Sub-Committees in order to enhance its supervision effectiveness over operations of the Bank, each committee member’s expertise, skills and background was considered while forming the committees to assure the best supervision of the committee over the bank’s operation according to each committee responsibilities.

With effect from the end of the Annual General Meeting on 01/04/2013, Mr. Ahmad Al-Sumait stepped down from the Bank’s Board of Directors and Mr. Masaud Hayat was appointed as Board Member, the composition of the Board Sub-Committees was adjusted accordingly.

Board Corporate Governance Committee (BCGC):

The BCGC shall essentially be responsible for assisting the Board in setting the Bank’s corporate governance policies and following-up on its execution and periodic review to ensure its effectiveness.

BCGC held (7*) meetings during 2013.

BCGC Members No. of meetings attended (2013)

Mr. Majed E. Al Ajeel 7

Mr. Mohammed A. Al Bisher 6

Mr. Faisal M. Al Radwan 7

Mr. Masaud M. J. Hayat 6

* out of which (3) by circulation

Board Nomination and Remuneration Committee (BNRC)

The BNRC shall be responsible for presenting recommendations to the Board regarding nomination to the Board’s membership, review of Board structure on an annual basis, undertake performance evaluation of the overall Board and the performance of each member on annual basis, and developing Bank-wide reward policy in line with applicable laws and regulations. In addition, BNRC shall be responsible for appointment of the senior positions of the Executive Management, ensuring that these positions are occupied by qualified employees along with setting performance standards and succession plans.

BNRC held (6*) meetings during 2013.

BNRC Members No. of meetings attended (2013)


Mr. Samer S. Khanachet 5

Mr. AbdulSalam M. Al Bahar 4


Board Audit Committee (BAC)

The BAC shall be responsible for setting and overseeing the sufficiency of internal control and audit functions of the Bank, along with ensuring compliance with applicable laws, policies, instructions and code of business conduct and ethics.

BAC held (14*) meetings during 2013.

BAC Members No. of meetings attended (2013)

H.E. Abdul Kareem A. Al Kabariti 11

Mr. Sadoun Abdulla Ali 14

Mr. Pinak P. Maitra 14

Mr. Mazen Essam Hawa (Advisor) 10


Board Risk Committee (BRC)

The BRC shall be responsible for providing review and report to the Board on the current and future risk strategy and tolerance along with supervising implementation of this strategy by the Executive Management. The BRC shall ensure existence of effective systems for risk management and independence of these functions.

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BRC held (5*) meetings during 2013.

BRC Members No. of meetings attended (2013)

Mr. Mohammed A. Al Bisher 5

Mr. Pinak P. Maitra 5

Mr. Sadoun Abdulla Ali 5


Board Executive Committee (BEXCO)

The BEXCO shall be responsible for directing and monitoring the Executive Management of the Bank in execution of the strategic plan as approved by the Board of Directors and other daily operations of the Bank.

Board & Management Investment Committee (BMIC), a sub-committee of BEXCO, shall provide an oversight on the Bank’s investment activities and make decisions within its delegated authorities and implementing the Board’s decisions outside its authority.

BEXCO held (12*) meetings during 2013.

BEXCO Members No. of meetings attended (2013)







Board Credit Committee (BCC)

The BCC shall act as the focal point in the credit activity of the Bank and shall consider and grant approval on behalf of the Board.

Board Credit Recovery Committee (BCRC), a sub-committee of the BCC, shall provide an oversight on the Bank’s credit recovery and make decisions within its delegated authorities.

BCC held (60*) meetings during 2013.

BCC Members No. of meetings attended (2013)







Accomplished tasks

During the year 2013 and in light of each committee’s responsibilities and authorities, Board Committees - supported by respective committee members’ skills and background- have handled all assigned tasks effectively which helped the Board enhancing the control and supervision effectiveness over operations of the Bank.

Board Secretary

The board secretary ensures the flow of information to enable the board to be aware of its duties and helps the board on discharging its responsibilities effectively and continuously, the Board Secretary keeps the board abreast of relevant changes in legislation and governance best practices.

The Board Secretary verifies that the new board members have obtained the required induction program and follow-up with the concerned department in the bank to verify that it has provided the required training programs to the board members.

To enable the board to function effectively, all directors have full and timely access to information that may be relevant in the proper discharge of their duties. This includes information such as corporate announcements, investor communications and other developments that may affect the Bank and its operations.

Ms. Madiha Bouftain was appointed Board Secretary on Apr. 2013, Ms. Madiha spent 14 years at Burgan in various roles. In her last role, she served as a Manager - Board Affairs responsible for:

1. Ensuring the effective functioning of the board by providing support to the Chairman, the Vice Chairman and the Board Members.

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2. Being focal point for all communication related to Board and Board Committee meetings, and coordinates between Board of Directors and Bank Management.

3. The custody of all Board related records.

Ms. Madiha served as Manager - Board Affairs from Jan. 2005 and is, therefore, well experienced.

Board Members Remuneration

Information on Board Members Remuneration is disclosed in the “Income Statement” as well as in the notes to the financial statement “Note 18 - Transactions with related parties” in the Annual Financials.

Related Party Transactions

For information on related party transactions please refer to Note 18 “Related Party Transactions” in the Annual Financials.

Code of Conduct

Burgan Bank’s Code of Conduct describes the values and minimum standards for ethical business conduct that we expect all of our employees to follow. These values and standards govern employee interactions with our clients, competitors, business partners, government and regulatory authorities, and shareholders, as well as with other employees. In addition, it forms the cornerstone of our policies, which provide guidance on compliance with applicable laws and regulations. Burgan Bank’s directors, executive management and employees are committed to the highest degree of adherence to the code of conduct policies.

The current version of Burgan Bank’s Code of Business Conduct and Ethics is available on our website www.burgan.com

Conflicts of Interest

In accordance with the CBK corporate governance instructions and the Meeting Guidelines for Board and Committees, Directors are required to disclose to the Board any interest they may have that might cause a conflict of interest. Any Director with a material personal interest in a matter being considered by the Board shall not attend nor vote on the matter being considered.

Bank’s Code of Conduct listed some cases that represent examples of potential conflicts of interest.

Compliance with the CBK instructions on the Rules & Regulations of Corporate Governance in Kuwaiti Banks

(Declaration of Conformity 2013)

The Declaration of Conformity is pursuant to CBK instructions No. (2/RB/RBA/284/2012) on the Rules & Regulations of Corporate Governance in Kuwaiti Banks issued on June 20, 2012. The Board of Directors stated that Burgan Bank has complied and will continue to comply with the CBK instructions on the Rules & Regulations of Corporate Governance in Kuwaiti Banks. Since then, Burgan Bank has complied with the recommendations of the “Corporate Governance Instructions” in its version dated June 20, 2012.

Burgan Bank has done all the necessary amendments to its policies to be in line with the CBK instructions aiming for implementing sound corporate governance practices, the Bank has formed the required Board Committees to enhance its supervision effectiveness over operations of the Bank, and updated the Corporate Governance manual to reflect the governance measures adopted by the Bank. The current version of the manual is available on the Bank’s website www.burgan.com.

Furthermore, as disclosure is considered an effective tool to influence companies’ behaviour and protect investors, the Bank has adopted a disclosure and transparency policy that serves shareholders, depositors, and stakeholders. By the disclosure and transparency policy, the bank commits itself to an accurate and timely disclosure for any critical information related to the Bank.

Risk Management

The Bank has set up a Risk Management Group headed by the Group Chief Risk Officer who reports directly to the Board Risk Committee, in order to ensure the independence of the function. The Risk Management Group does not have any business targets in terms of either levels of business or income/profits to be achieved, with a view to ensuring its objectivity in analysing the various risks. The mission of the Group is to identify, measure and control various risks and report to the top management of the Bank on the effects and, where possible, mitigations. The board reviews and provides guidance regarding the alignment of banks strategy with risk appetite and the internal risk-management structure. The Bank has a well-documented Risk and Disclosure Policy that classifies the risks faced by it in its day-to-day activities into certain families of

29

risks and accordingly specific responsibilities have been given to various officers for the identification, measurement, control and reporting of these identified families of risks using appropriate metrics to analyse and evaluate the extracted data. Among the families of risks are:

i. Credit Risk which includes default risk of clients and counterparties

ii. Market Risk which includes interest rate, foreign exchange and equity risks

iii. Operational Risk which includes risks due to operational failures

The Risk Management Group is organised into, among others, three departments each responsible for one of the above three families, viz. the Credit Risk, Market Risk and Operational Risk departments who together ensures the effectiveness of managing banks risk portfolio taking into consideration all internal and external economic changes that might affect bank’s stability and growth. In addition to that, Risk Management Group confirms that each director and group head is aware of the size of risks faced by the bank through timely distribution of reports to the board and to the related committees in order to disseminate risk management culture within the bank and across subsidiaries

Majority of the subsidiaries, have an independent risk management function reporting directly to the respective CEOs, as per their respective regulatory guidelines, with a dotted line reporting to GCRO. These Risk functions are organised into, among others, three sections responsible for the three families of risks stated above. Among the subsidiaries, JKB has already put in place an independent Risk Management function and has developed an ICAAP policy with the due approval of its Board of Directors, taking into account the applicable rules of Central Bank of Jordan (CBJ). Since the regulations in other jurisdictions do not mandate this as yet, the Bank will, in due course, assist the subsidiaries to develop their own ICAAP policies, suited to their requirements. In the meanwhile, the ICAAP is applied by the Bank at the consolidated as well at the subsidiary wise level of assets and liabilities.

Report on Internal Control Systems

As defined in the Committee of Sponsoring Organisations (COSO) Internal Control - Integrated Framework, Internal controls are the processes, effected by an entity’s Board of Directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives relating to operations, reporting, and compliance.

The Internal Control Systems consist of all the policies and procedures, methods and measures (control measures) instituted by the Board of Directors and Executive Management to ensure that operational activities are conducted in an appropriate manner. Organisational measures for internal controls are integrated in banking operations, which means that these activities are performed simultaneously with working processes or performed directly before or after such processes are carried out.

Internal Control Systems aim:• Attainmentofbusinessobjectivesthrough

efficient management• Adherencetoapplicablelawsandregulations

(compliance)• Safeguardthevalueofbusinessassets• Prevention,reductionandexposureoferrors

and irregularities• Timelyandreliablefinancialreporting

It is important to note that despite all measures the Bank may take, the Internal Control methods and procedures used may offer sufficient but never absolute certainty.

The Board of Directors has an oversight responsibility over the Internal Control Systems, who obtain reasonable assurance regarding the sufficiency and appropriateness of these systems from the Executive Management.

The Executive Management, in turn, develops, implements, executes and monitors the Internal Control Systems within the Bank. The Executive Management has a management, control and evaluation system in place with the objectives of ensuring that:

• Businessprocessesareeffectiveandefficient• Applicablelawsandregulationsareobserved• Financialreportingisreliable

Internal Controls at the Bank are integrated directly into operating processes, either automated or manual. Automated controls are embedded in the

30

IT systems employed and are often complemented by the manual controls. Data quality on initial entry into systems is ensured by control measures such as the dual-control principle, authority matrices, segregation of duties and by certain measures taken by the Management.

Sufficient IT governance measures have been implemented to ensure centralised control over all systems and technology components, related to technical and business processes. The Bank’s Information Security Unit (under Operational Risk Management) effectively monitors the system and data security and control structures and is certified under international information security standards.

Management Committees

The Board Committees and Executive Management of the Bank formed the following Management Committees to strengthen the Internal Control Systems in the Bank:

• ManagementAuditCommittee(MAC)• ManagementCreditCommittee(MCC)• ManagementRisk&InternalControlsCommittee

(MRICC)• ManagementExecutiveCommittee(MEXCO)• AssetManagementandLiabilityCommittee(ALCO)• LoanProvisionCommittee(LPC)• Product&PricingCommittee(PPC)• ProcurementCommittee(PC)

The purpose, composition, operations and the responsibilities for each of these individual Management Committees are documented in their respective charters and approved by the Board of Directors. The Management Committees of the Bank are an integral part of the Corporate Governance framework. Each Committee evaluates its performance under their respective charter on an annual basis and shall recommend amendments to their charter (if any) to the Board, as may be seen important to improve its performance or its relationship with the corresponding Board Committee (where applicable).

Internal Audit

The Internal audit department is an independent, objective assurance and consulting activity designed to add value and improve the Bank’s operations. It helps the Bank accomplish its objectives by bringing a systematic, disciplined risk based approach to evaluate and improve the effectiveness of risk management, control, and governance processes. The Group Chief Internal Auditor reports functionally to the Board Audit Committee and administratively to the Group Chief Executive Officer. The Executive Management is responsible for ensuring that recommendations made by the Internal Audit department are implemented within appropriate and agreed time lines.

Policies and procedures

The Executive Management establishes control activities that are built into business processes and day-to-day activities through policies and procedures, specifying actions, responsibilities and accountabilities for control activities with relevant management personnel. The Bank has relevant policies and procedures for all its departments and functions in an integrated and cost effective manner. The Executive Management periodically reviews policies and procedures to determine their continued relevance, and updates them as necessary.

Monitoring

The Executive Management maintains a balance of ongoing and ad hock evaluations of the Bank’s Internal Control Systems. The design and current state of Internal Control Systems are used to establish a baseline for ongoing evaluations, which are built into the business processes and adjust to changing conditions.

The Executive Management and the Board of Directors, as appropriate, assess results of ongoing and ad hock evaluations. Deficiencies (if any) are communicated to parties responsible for taking corrective action and monitor whether deficiencies are remediated on a timely basis.

Shareholder Composition

Main shareholders who own 5% or more of the Bank’s shares (2013 & 2012)

Shareholder Nationality No. of Shares % No. of Shares % 31/12/2013 31/12/2012

Kuwait Projects Company Kuwaiti 663,022,819 40.87 631,450,304 40.87 Holding K.S.C. (Closed)

United Gulf Bank B.S.C. Bahraini 275,821,614 17.00 262,687,252 17.00

Public Institution for Social Security Kuwaiti 116,587,451 7.19 114,875,631 7.44

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The Bank has employed various control functions and tools to ensure the adequacy and effectiveness of controls, such as:

• RiskandControlSelfAssessment(RCSAs)andInternal Control Charts for all its major functions that enable the respective supervisory employees to follow and exercise controls over their processes and activities

• Complianceunittoreview,monitor,guideand report on the Bank’s compliance against applicable laws and regulations

• InternalcontrolunittosupporttheBankinenhancing the effectiveness of the existing control environment, through monitoring and implementation of control monitoring tools that are aligned to the Bank’s strategic objectives

• Antimoneylaunderingunittoensurestrictcompliance and reporting according to the applicable Anti Money Laundering and Counter Terrorism Financing rules and regulations

• Branchcontrolunitforeffectiveandefficientmonitoring of the branch operations

• Assetsandliabilitiesdepartmentforrealtimemonitoring of the applicable banking operations

Based on the evaluations conducted by the Executive Management and Board of Directors during the year, there are no critical control deficiencies identified which may need to be reported in the Annual Financial Statements for the year ended 31 December 2013.

Internal Audit

Group Internal Audit provides an independent and objective assurance over the design and operating effectiveness of our system of internal controls by performing periodic risk based audits and reviews. Audit reports are produced summarising the results from each performed audit which are distributed to the responsible heads of the auditable departments/units. These reports provide evidence to support the annual evaluation of the overall operating effectiveness of the internal control environment. However, any internal control system can only provide reasonable, but not absolute assurance that the objectives of that control system are met. Further, the design of a control system must reflect the fact that there are resources constraints, and that the benefits of controls must be considered relative to their costs.

As a result of the above evaluation, it can be concluded that the internal control environment is appropriately designed and operating effectively as of 31st December 2013.

Human Resources and Development

Remuneration Policy

The remuneration policy aims at enabling the Group to attract, retain, motivate and reward qualified workforce while ensuring fairness and consistency as well as being appropriately risk balanced. The policy reflects the Groups objectives for good corporate governance as well as sustained and long term value creation for all stakeholders. The Remuneration policies and practices form part of the Group’s overall obligation to have robust governance arrangements in place.

Employees are entitled to different remuneration components targeting appropriate and balanced remuneration package based on the employee job grade taking into consideration the employees skills, experience, and his role in the Bank as well as market practice.

The remuneration components consist of all forms of payments or benefits in exchange for the services provided by the employee and can be divided into:

• Fixedremunerationbasedonemployeejobroleand market

• Variableremunerationdependingonemployeeperformance

Variable remuneration may be paid in cash and may be subject to a vesting or deferral period. Remuneration amounts are based on the bonus pools approved by the Board for the purpose of rewarding employee performance. The total amount of performance related remuneration is based on a combination of the assessment of the overall results of the Bank, of the performance of the business unit and of the individual concerned. When assessing individual performance, financial and non‐financial targets and metrics are taken into account.

The payout of the variable remuneration may be deferred -as approved by the Board annually in line with the approved policy over a period of time not exceeding three years. The variable remuneration, including the deferred portion, is paid or vests only if it is sustainable according to the financial situation of the Bank as a whole, and justified according to the performance of the Bank, the business unit and the individual concerned.

The Board Nominations and Remuneration Committee (BNRC) is responsible for presenting recommendations to the Board on the Bank-wide reward policy in line with applicable laws and regulations. The composition and responsibility of BNRC is further detailed under the Board Sub-Committees section of the Corporate Governance Report.

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Qualifications and Experience of the Bank’s CEO, his Deputies and Assistants

a Group Chief Executive Officer

Eduardo Eguren

Mr. Eguren was appointed as the Group Chief Executive Officer of Burgan Bank in September 2010. Mr. Eguren has over 29 years’ experience in global corporate, retail and commercial banking

across five continents. Prior to joining Burgan Bank, Mr. Eguren was the CEO for the Global Commercial Banking Operations for Barclays Bank in the United Kingdom. From 1984-2007, Mr. Eguren held senior management positions at Citigroup, Citibank, Citi including Chief Financial Officer and Chief Operating Officer covering the businesses including corporate and retail banking, asset management, insurance and pension funds in Latin America, Europe, Asia, North America and Africa. He has extensive experience in developing, implementing and driving forward strategies for a number of global banks and initiating inorganic growth opportunities in Emerging Markets.

Mr. Eguren is a Chartered Accountant-Bachelor of Administration from Montevideo University, Uruguay.

b CEO’s Deputies and Assistants - Named in Arabic alphabetical order (first name basis)

Adrian GostuskiGroup Chief Operating Officer and Acting Head of Investment Banking & Treasury

Mr. Gostuski joined Burgan Bank in 2011. As the Group Chief Operating Officer, Mr. Gostuski

is responsible for leading the group’s operational areas of finance, legal, banking operations, internal control and technology. He is currently also handling the responsibility of the Investment Banking & Treasury Group. Mr. Adrian Gostuski is a banking professional with over 35 years of experience. He has solid international experience, both in Developed Economies and Emerging Markets, with expertise in Finance, Investment Management and M &A. He has diverse experiences as CFO and in Senior Executive positions for Operations, Technology, Treasury and Equity Funds. Prior to joining Burgan Bank, Mr. Gostuski has worked at Barclays - London, and Citigroup for over 23 years in various capacities of which the last seven years were in the capacity of CFO in Mexico and Singapore.

Mr. Gostuski is a Certified Public Accountant (CPA) from Buenos Aires University, Argentina and also holds a Masters in Business Administration in Strategic Planning from ESEADE, Buenos Aires, Argentina.

Elyas Naser Group Head of Strategic Business Department & Chief of Staff

Mr. Naser joined Burgan Bank in 2011 as Head of Group Special Projects with the Group Operations Office and then

moved to Head of Strategic Business Department & Chief of Staff in 2013. Mr. Naser is responsible for maximising value of assets, through strategic planning of investment activities and managing post acquisition activities. These entail leading the process of evaluating and structuring of mergers & acquisitions, investments and financing-related opportunities and focusing on synergies across the group. Prior to joining Burgan Bank, Mr. Naser worked with various financial organisations in the region including HSBC, Central Bank of Bahrain and United Gulf Bank for over 10 years.

Mr. Naser holds a Bachelor’s degree in Banking and Finance from the University of Bahrain.

Bashir JaberGroup Head of Corporate Communications

Mr. Jaber joined Burgan Bank in 2006. As the Group Head of Corporate Communications, Mr. Jaber is responsible for

managing Burgan Bank’s corporate marketing which includes investor relations, brand management, relationship management, external communications and corporate social responsibility. Mr. Jaber has over 12 years of experience and prior to joining Burgan Bank, Mr. Jaber held various positions globally at Ogilvy and Mather Worldwide - an international advertising, marketing and public relations group.

Mr. Jaber holds a Bachelor’s degree in Advertising & Marketing from Notre Dame University, Lebanon, plus a post graduate diploma in Business Administration from University of Leicester in the United Kingdom.

Management Team

33

Hanan Mohamed MetwalliGroup Head of Compliance

Mrs. Metwalli has joined Burgan Bank in 1988 and has been with Burgan Bank for over 23 holding a number of positions for 16 years in the credit department,

Corporate banking and Risk Management Groups. Mrs. Metwalli has been assigned as the Head of Compliance since 2006 and is responsible for monitoring the implementation and application of strategies, action plans and policies in accordance with the principles and guidelines issued by the Basel Committee and different regulators to ensure regulatory compliance of the group represented by the Central Bank of Kuwait, Kuwait Stock Exchange, Capital Markets Authority and other regulatory bodies. Prior to joining Burgan Bank, Mrs. Metwalli has 11 years of experience in various roles at Al Ahli Bank of Kuwait, Commercial Bank of Kuwait and Gulf Bank.

Mrs. Metwalli holds a Bachelor’s degree of Commerce (Accounting) from the University of Alexandria - Egypt, and holds the degree of a Certified Compliance Officer (CCO) from American Academy of Financial Management (AAFM).

Khalid Fahad Al ZoumanGroup Chief Financial Officer

Mr. Al Zouman joined Burgan Bank in 2000 as Head of Risk Management, before moving into the role of Chief Financial Officer in 2003. He is mainly

responsible for the strategic planning for the finance activities for the Group to support the Bank corporate strategy and to ensure the development and implementation of financial guidelines, controls and reporting procedures to support management in the achievement of profitable business plans. Mr. Al Zouman has over 25 years’ experience working in Kuwait and international markets in financial management - with a particular emphasis on accounting and auditing. Prior to joining Burgan Bank, Mr. Al-Zouman held senior financial management roles with Ernst & Young in Kuwait and in the United States.

Mr. Al Zouman is a Certified Public Accountant (CPA) from the State of New Hampshire, USA, and also holds a Bachelor’s degree in Computer Science from Kuwait University.

Raed Al HaqhaqChief Banking Officer

Mr. Raed Al Haqhaq joined Burgan Bank in 2000 and held senior roles in Corporate Banking, heading it as General Manager- Corporate Banking

from 2005 before moving into the role of Chief Banking Officer in 2008. Mr. Al Haqhaq is presently heading the Banking Group with direct responsibility for the bank’s corporate banking portfolio development and growth, development of new and expansion of existing business relationships. He is also responsible for managing the Bank’s relationship with Financial Institutions across a wide range of geographical regions. Mr. Al Haqhaq has over 19 years’ local and international experience in corporate and investment banking. Mr. Al Haqhaq began his career at the Kuwait Investment Authority and then moved to the International Investment Group where his last role was Assistant Vice President.

Mr. Al Haqhaq is a graduate of California State University, Sacramento, USA with a Bachelor of Science degree majoring in Strategic Management.

Steven Lee ReeceGroup Chief Risk Officer

Mr. Reece joined Burgan Bank in 2013 as Group Chief Risk Officer, Mr. Reece is responsible for leading Burgan Groups risk strategy and policy, identifying

appropriate risk limits and necessary control areas for products, services and procedures to meet the Bank’s business objectives. He will direct the planning, implementation and administration of the Bank’s risk management and loss prevention programs, policies and procedures. Mr. Reece has 33 years of experience of which 25 years were with Citibank. He is an experienced banking professional with strong technical understanding of overall risk functions. He has global experience working in UK, Europe, Asia and also the Middle East.

Mr. Reece holds a Bachelor’s degree in Philosophy from the East Carolina University, USA.

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Amr El-KasabyGroup Chief Internal Auditor

Mr. El Kasaby joined Burgan Bank in 2007. As the Group Chief Internal Auditor, Mr. El Kasaby is responsible for leading the internal audit function for the

Burgan Bank Group. Mr. El Kasaby has over 25 years’ experience in auditing and accounting, and he has led audit engagements across a broad cross section of industries including banking, trading, investment management, manufacturing, automotive and oil and gas while in Ernst & Young. Prior to joining Burgan Bank, Mr. El Kasaby was Deputy Manager of Internal Audit, Acting Chief Internal Auditor for the Kuwait Finance House.

Mr. El Kasaby is a Certified Public Accountant (CPA) from State of Oregon, USA, in addition to holding a Bachelor’s degree of Commerce in Accounting and Auditing from Kuwait University. Mr. El Kasaby is also a Certified Fraud Examiner (CFE) and Certified Internal Control Auditor (CICA).

Fahad Mohammed Al MenayesActing Chief Information Technology Officer

Mr. Al Menayes joined Burgan Bank in 2012 as Head of IT Operations. Mr. Al Menayes is

handling the responsibility of the Bank’s Information Technology department. He will lead and reinforce the bank’s strategic direction and leadership in terms of technology functions. Mr. Al Menayes has over 17 years of experience in Information Technology field mainly at Al Ahli Bank of Kuwait & Burgan Bank.

Mr. Al Menayes holds a Master’s degree of Science in Software Engineering and a Bachelor’s degree in Computer Science and Math from Monmouth University, USA.

Venkatakrishnan MenonChief Operations Officer & Acting Chief Retail Banking Officer

Mr. Menon joined Burgan Bank in 2005. As the Chief Operations Officer, Mr. Menon is responsible for the activities of

the Operations Group, the planning, implementation, and administration of the Bank’s operational and support functions such as branch operations, banking operations, general services administration and Operations Strategic Development. He is also currently handling the responsibility of Retail Banking for effective delivery of the retail banking strategy. Mr. Menon has over 28 years of experience and prior to joining Burgan Bank, Mr. Menon held senior management roles at BNP Paribas, Standard Chartered Bank and HDFC Bank.

Mr. Menon holds a Master’s degree in Business Management and Bachelor of Science from University of Bombay, India.

Lamya Ali KaramTreasurer

Mrs. Karam has a wide experience of over 26 years. She joined Burgan Bank in 1991 and has held various positions within Investment Banking &

Treasury Group. Mrs. Karam was assigned as Treasurer in 2013. She oversees the Bank’s liquidity portfolio to maximise profits while ensuring the safety and liquidity of investments, and is responsible to plan, direct and control trading and investment practices to ensure accomplishment of corporate investment goals within established policy.

Mrs. Karam is a graduate from Kuwait University holding a Bachelor’s degree in Economics.

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Mahmoud EzzatChief Legal Counsel

Mr. Ezzat joined the bank in the year 2000 as a Legal Advisor and was subsequently assigned as Chief Legal Counsel. Mr. Ezzat’s team is responsible for providing

comprehensive legal support for the bank’s wide range of corporate and commercial activities as well as legal matters concerning business development, contract management, litigation, employment law, collection and debt recovery.

Mr. Ezzat has over 22 years’ of experience as a Lawyer, having played a pivotal role within the sector, both within financial institutions and law firms. He was chosen as one of the key individuals to further develop the economic and commercial legislations in Kuwait with his most recent contribution being the drafting of the Companies Law in Kuwait which aimed at developing the country’s business environment, and encouraging robust investment opportunities by providing more flexible legislations.

Mr. Ezzat holds a Bachelor’s degree of Law from University of Cairo, Egypt.

Halah El-SherbiniGroup Chief Human Resources and Development Officer

Ms. El Sherbini joined Burgan Bank in 2011. Ms. El Sherbini is responsible for leading the development of group strategies

to build the capabilities and skills of Burgan Bank group staff, so that the Bank can deliver its business objectives and aspirations. Ms. El Sherbini has over 18 years’ experience and prior to joining Burgan Bank, Ms. El Sherbini was the Head of Human Resources at Ahli United Bank and Citibank Kuwait and also held various leadership roles at Gulf Bank and National Bank of Kuwait.

Ms. El Sherbini is a graduate of Alexandria University, Egypt with a Bachelor’s degree in English Literature and holds a Professional in Human Resources (PHR) Certificate from Society for Human Resource Management (SHRM) Ms. El Sherbini is a Certified Professional Trainer from Arab Bankers Association and a Certified Assessor from SHL.

Remuneration disclosure by Employee Category

Category No. of employees

Annual Remuneration Packages

employees

Fixed Variable ** Total Remuneration

Group – 1: CEO and his deputies and assistants and the main executive managers whose appointment is subject to the approval of supervisory parties (Senior Management)

16 2,118,185 1,001,3493,119,534

Group – 2: Financial Risk & Control responsibilities 7 327,857 92,625 420,482

Group – 3: Material Risk Takers 5 289,851 79,583 369,434

Grand Total 28 2,735,893 1,173,557 3,909,450

Notes: All remunerations are paid in cash. Variable remuneration is on estimate basis for 2013.

Remuneration for five of the major executives who received the highest remuneration from the Bank, in addition to all the functions as required by the Corporate Governance guidelines (as a group): KD 2,223,137

36

Group Chief Executive O�cer

(GCEO)

Shareholder’s Assembly

Board of Directors

Board Corporate Governance Committee

(BCGC)

Board Credit Committee

(BCC)

Board AuditCommittee

(BAC)

Board Executive Committee

(BEXCO)

Board Risk Committee

(BRC)

Board Nomination & Remuneration

Committee (BNRC)

Board & Management

Investment Committee (BMIC)

Board Credit Recovery

Committee(BCRC)

Board Secretariat

Group Internal Audit (GIA)

External Audit

Burgan Bank, Kuwait

Board Committee

Group Level

Subsidiaries

Chairman of the Board

Anti Money Laundering

(AML)

Group Risk Management

(GRM)

Group Compliance Department

(GCD)

Group Strategic Business

Development (GSBD)

Group Human Resources &

Development (GHRD)

Group Corporate Communications

(GCCD)

Group Operations O�ce (GOO)

Private Banking Group (PBG)

Legal Division (LD)

Group Strategic Financial Planning & Control Group

(GSFP&C)

Information Technology Group (IT)

OperationsGroup(OG)

Internal Control Unit

(ICU)

Client Complaints Unit

(CCU)

Banking Group(BG)

Retail Banking Group(RBG)

InternationalOperations

O�ce(IOO)

Group Investment Banking Treasury

Group (GIBT)

Jordan Kuwait Bank

(Jordan)

Algeria Gulf Bank (Algeria)

Tunis International

Bank (Tunisia)

Bank of Baghdad

(Iraq)

Burgan Bank (Turkey)

Corporate Governance structure

38

driven by you

1. Introduction

These instructions including subsequent amendments thereto cover comprehensively the calculation of the Capital to Risk Assets Ratio (CRAR) under Pillar 1 of RCAS, the supervisory oversight under Pillar 2 and the disclosure of information under Pillar 3. Given below are the necessary disclosures pertaining to the Bank’s Capital Structure, Risk Management objectives and policies, information relating to the Credit Exposure, Credit Risk Mitigation, Market Risk and Operational Risk as required under the CBK regulations. In arriving at the CRAR, in accordance with the regulations, the Standardised Approach has been used for the computation of the Risk Weighted Assets (RWA).

2. Subsidiaries And Significant Investments

i The CBK regulations apply to:

Burgan Bank S.A.K

ii Basis of Consolidation

The Bank has five subsidiaries as on 31st Dec. 2013. These are the following commercial banking entities acquired during the years 2008 – 2012 whose financials are consolidated in the Bank’s financial statements.

Pillar 3 disclosures for the full 2013 year

Comments have been made, where appropriate, in regard to the approach and process in these subsidiaries. The practices in all the group entities are not uniform due to banking practices and regulatory requirements in the respective countries of operation. However, a level of harmonisation has already been put in place for the purpose of meaningful consolidation of the financial position & performance and reporting in accordance with Basel II. Also, under an ongoing process of post-acquisition integration, international best practices as are applicable and practical in the region have been identified and are being implemented in all the entities.

iii. Restriction/Impediments on Fund Transfers

Transfer of funds or regulatory capital within the group entities is subject to the applicable rules and regulations in the respective jurisdictions. While some of the countries of incorporation of the subsidiaries have liberalised foreign exchange regimes others have exchange control regulations governing cross-border transfer of funds. Any transfer of regulatory capital among the group entities is subject to the applicable laws and regulations and the receipt of necessary approvals from the respective authorities.

3. Capital Structure

i. Main features of Capital Instruments

The Bank’s paid up capital entirely consists of ordinary shares which have proportionate voting rights. These are listed in the Kuwait Stock Exchange and are actively traded thereon.

Under the directives of Central Bank of Kuwait (CBK), banks operating in Kuwait are required to apply the Revised Capital Adequacy Standard (RCAS) in line with the Basel Committee’s revised capital adequacy framework issued in June 2004, popularly known as Basel II, with effect from 31 December 2005.

Burgan Bank Subsidiaries

Name Country of incorporation

Paid-up Capital

Effective holding %

Date of becoming a subsidiary

Jordan Kuwait Bank (JKB)

Jordan Jordanian Dinars 100 million

51.19% 10 Jul 2008

Gulf Bank Algeria (AGB)

Algeria Algerian Dinars 10 billion

91.13% 30 Apr 2009

Bank of Baghdad (BOB)

Iraq Iraqi Dinars 250 billion

51.79% 10 Jan 2010

Tunis International Bank (TIB)

Tunisia United States Dollars 50 million

86.70% 27 Jun 2010

Burgan Bank – Turkey

Turkey Turkish Lira 570 million

99.26% 21 Dec 2012

Table I – Insurance Subsidiaries And Significant Investments KD’000s

Current book value of investment in insurance entities, which are risk weighted*

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Name of the insurance company Kuwait Reinsurance Company K.S.C.C

Country of incorporation Kuwait

Ownership % 0.075

* Had the amount been deducted from the capital, the CRAR would have been 15.407%, instead of 15.408% as shown.

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As at 31 December 2013, the share capital comprised of 1,622,215,539 issued and fully paid equity shares of KD 100 fils each and the bank’s capital structure was as follows:.

4. Capital Adequacy

i. Bank’s Approach to Capital Adequacy Assessment

The Bank has in place a system under which the capital adequacy of the Bank as well as the CRAR are being calculated at regular intervals, based on the CBK circular instructions dated 12/12/2005 and subsequent amendments. Based on this system, the CRAR of the Bank has been above the required threshold of 12% during the year 2013.

The Bank also has in place a policy for Internal Capital Adequacy Assessment Process (ICAAP) that is compliant with the CBK instructions in regard to Pillar 2 of Basel II and has been duly approved by its Board of Directors during the year. The ICAAP policy covers additional risks apart from the three risks, viz. Credit, Market and Operational risks covered under Pillar 1 and assesses additional capital requirements for these additional risks over and above the minimum level stipulated by the CBK. A copy of this policy document has also been sent to CBK for their information and records. Additionally, the Bank also conducts a stress test which calculates the effect on its profits and CRAR in cases of stress, based on certain scenarios.

The Bank takes into account the CRAR calculations in respect of all its future business plans so as to ensure that, at all times, the level of its eligible capital is sufficient to meet the expected increase in business and particularly the level of RWAs. The Bank takes into consideration developments locally and in the region, the expected changes in the banking environment and the fact that the CRAR prescribed by the regulators is considerably above the international norm of 8% as recommended by the Basel Committee while examining the level of capital that it would like to maintain. The Board also takes into consideration other relevant factors such as the Bank’s future business plans, the new areas of business

under examination and the nature of the attendant risks etc. The Bank has in place a well documented Internal Capital Adequacy Assessment Process (ICAAP) Policy which takes into consideration additional risks beyond the three risks covered under Pillar 1 of the RCAS. This policy has been developed to fully comply with the CBK regulations on Pillar 2 of RCAS. The internal assessment process for capital requirements is carried out periodically by the bank taking into account not only its position for the time being but also the future business plans.

The Bank has put in place a system that will enable it to compute the CRAR under the applicable CBK instructions at such periodic intervals as may be deemed necessary, taking into account all the necessary details of its asset portfolio including Credit Risk Mitigation (CRM) techniques, the factors that give rise to market risk as also the capital necessary for operational risks. The internal budgetary and performance measurement systems of the Bank take into account the impact of the future growth and performance of its various business groups on the capital allocated to each such business group. It is the intention of the Bank, in due course, to develop a system that will allocate an economic capital to each business group based on its risk profile such that performance measurement is related to the return on the economic capital deployed in the concerned business group.

As regards the subsidiaries, the respective banking regulations in regard to capital adequacy are different in each of the jurisdictions. While the authorities in – Jordan and Turkey have mandated the application of the Basel II recommendations as adapted to suit the respective local requirements, others, viz. Algeria, Iraq and Tunisia are yet to finalise the regulations in this regard. Where Basel II rules have been applied in any of the subsidiaries, this has been done using the Standardised Approach.

The relevant CBK regulations on Basel II have however been applied for the consolidated financial position of the Bank and its subsidiaries.

Table II – Capital Structure Of The BankKD’000s

Paid up share capital 162,222

Reserves 333,072

Less: Treasury shares (37,683)

Less: Goodwill (86,050)

Less: Investments in unconsolidated subsidiaries and significant minority investment

(4,084)

Minority interest 106,888

T I E R 1 Capital 474,365

45% of fair valuation reserves 3,171

General provision subject to 1.25% of the credit Risk Weighted Assets (RWA’s)

57,219

Subordinated debt 209,994

Less: Investments in consolidated subsidiaries and significant minority investment

(4,084)

T I E R 2 Capital 266,300

T I E R 3 Capital –

Total Eligible Capital after deductions 740,665

Table III – Capital Requirement For Each Standard PortfolioKD’000s

Claims on sovereigns 9,635

Claims on public sector entities 10,740

Claims on banks 48,986

Claims on corporates 250,324

Regulatory retail exposures 62,854

RHL Eligible for 35% RW 323

Past due exposures 5,602

Other exposures 160,842

Total 549,306

Less: General provision in excess of 1.25% of RWA’s

(13,764)

Total Credit risk weighted exposure 535,542

Market risk exposure under Standardised approach

5,069

Operational risk exposure 36,219

Grand Total 576,830

Total Capital Ratio (%) 15.4%

T I E R 1 Capital Ratio (%) 9.9%

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5. Risk Management

The Bank has set up a Risk Management Group headed by the Group Chief Risk Officer who reports directly to the Board Risk Committee, in order to ensure the independence of the function. The Risk Management Group does not have any business targets in terms of either levels of business or income/profits to be achieved, with a view to ensuring its objectivity in analysing the various risks. The mission of the Group is to identify, measure and control various risks and report to the top management of the Bank on the effects and, where possible, mitigations. The Bank has a well documented Risk and Disclosure Policy that classifies the risks faced by it in its day-to-day activities into certain families of risks and accordingly specific responsibilities have been given to various officers for the identification, measurement, control and reporting of these identified families of risks. Among the families of risks are:

i. Credit Risk which includes default risk of clients and counterparties

ii. Market Risk which includes interest rate, foreign exchange and equity risks

iii. Operational Risk which includes risks due to operational failures

The Risk Management Group is organised into, among others, three departments each responsible for one of the above three families, viz. the Credit Risk, Market Risk and Operational Risk departments.

Majority of the subsidiaries, have an independent risk management function reporting directly to the respective CEOs, as per their respective regulatory guidelines, with a dotted line reporting to GCRO. These Risk functions are organised into, among others, three sections responsible for the three families of risks stated above. Among the subsidiaries, JKB has already put in place an independent Risk Management function and has developed an ICAAP policy with the due approval of its Board of Directors, taking into account the applicable rules of Central Bank of Jordan (CBJ). Since the regulations in other jurisdictions do not mandate this as yet, the Bank will, in due course, assist the subsidiaries to develop their own ICAAP policies, suited to their requirements. In the meanwhile, the ICAAP is applied by the Bank at the consolidated as well at the subsidiary wise level of assets and liabilities.

A. Credit risk

i. Strategies and Processes

The Bank has a well-documented Credit Policy that complies with CBK regulations and describes the appetite of the Bank for assumption of risks in its various business groups viz. the Corporate Banking, Private Banking, Retail Banking and Financial Institutions groups. The Credit Policy has been developed by the Risk Management Group in consultation with the business groups and under the guidance and approval of the Board. All the business groups are required to market for business and present credit proposals in accordance with the general and specific guidelines stated in the Credit Policy.

Subject to the guidelines of the Policy, each business group may draw up its own business strategy, which is deliberated at the Executive Committee of the Bank and approved by the Board Executive Committee. The Policy also defines the types of products that the various business groups can market to their clients and counterparties. Any new product is required to undergo a specific validation process before its launch.

The Bank’s subsidiaries also have their respective credit policies that govern the grant of credit facilities to clients segmented suitably, based on the market in their respective business areas. Subject to the respective local business environments and the specific requirements applicable in each jurisdiction, the policies of the subsidiaries have a similar coverage.

ii. Structure and Organisation

The Credit Risk Department is headed by Head of Credit Risk and has independent teams that are respectively responsible for Credit Risk Analysis and Credit Control. The Credit Risk Analysis function is responsible for making independent risk analysis and appraisal of credit proposals that are marketed by the business groups. This department gives its independent views/recommendations on credit proposals brought to it by the Relationship Managers of the various business groups. These proposals are then further processed in accordance with the delegation of powers approved by the Board. The Bank’s structure of delegation of powers envisages that a credit approval requires, in addition to the recommendation of the concerned business group, an independent enabling opinion of an official of the Risk Management Group at an appropriate level. This ensures that the approval process has an in-built mechanism of checks and balances with the concurrence of an independent functionary before a credit proposal can be approved. To be noted that under the new Corporate Governance Code, Risk Management personnel do not have any signing power or approving authority, but can give their independent opinion on the proposal.

The subsidiaries are in the process of setting up similar structures and organisations, subject of course to their respective local conditions and business environments. While JKB, TIB and BBT already have similar organisations in place, as regards the other two subsidiaries, in view of their business environment with less number of large corporate exposures and higher exposures to retail and small & medium business entities, the organisation is being made to adapt to the local requirements.

iii. Scope and Nature of Reporting Systems

After the approval of the credit proposal, the Credit Control unit of the Credit department is entrusted with the responsibility of checking that the conditions precedent for the draw-down of the credit facilities as approved are fulfilled before the facilities are made available to the client/counterparty. This unit, which is independent of the Credit Risk Analysis unit of the Department, also follows up on the conduct of the accounts by the client/counterparty in accordance with the terms of approval and reports any irregularities for necessary corrective action. This unit is also responsible to ensure that

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the relevant details for measurement of the risk and allocation of the appropriate risk weights to the exposures are made available in the system or otherwise, so that the computation of the RWAs can be made appropriately.

Since the Bank is at present required to follow the Standardised Approach for calculation of the RWAs, the internal ratings ascribed by the Bank for the obligors are not used in the process. However, bearing in mind the future needs of the Bank in the event of application of the more advanced methods, the Bank has in place an internal credit rating system, Burgan Credit Rating (BCR).

It is perceived that BCR has reached the end of its product life cycle and hence to keep pace with the changing business environment BB has initiated the process of implementing Moody’s Obligor Risk Rating system. It is expected to be fully functional by Q1-2015.

All the credit proposals approved under delegated authorities are reported with relevant details to the Board Credit Committee at regular intervals.

The subsidiaries will also have similar set up for the credit process after credit approval.

iv. Hedges and Mitigants

The Credit Policy of the Bank, while outlining the risk appetite as regards credit risk, has also laid down guidelines for mitigating risks in terms of availability of credit enhancements and/or collaterals to support the exposure, the coverage ratio of collateral value to the loan to be granted, the threshold levels for top-up of security and liquidation. The policy and procedures of the Bank also lay down the required methods and intervals for valuation of the different collaterals so as to determine the necessity for top-up by the client and/or procedure for liquidation. Since there are limited avenues for other types of hedges such as Credit Default Swaps etc. in the Kuwaiti banking environment, the chief mitigants considered are eligible collaterals and/or guarantee of acceptable third parties.

The collaterals accepted by the bank normally consist of cash in the form of deposits with the Bank, shares, bonds and units of mutual funds, various forms of real estate such as vacant lands, residential and commercial buildings, projects under construction etc. The scope to obtain any other type of collateral such as movables etc. is limited since the law does not recognise a hypothecation charge or a chattel mortgage. For the purposes of credit risk mitigation, only such of the collaterals that are permitted by the CBK and where the conditions stipulated are fully met are considered.

As regards shares, bonds etc., the Bank fulfils the stipulated regulatory requirements for their periodic valuation, application of haircuts etc. In regard to real estate assets, the Bank has employed independent, professional and govt. recognised valuers who are required to assess the value of the collateral before they are accepted as security. Where considered necessary, the Bank also seeks a second valuation. The periodicity of the valuation is again in line with the regulatory requirements.

The amount of a secured facility that a borrower can avail of is based on the valuation of security, after applying the necessary ratios on the same, in terms of the conditions of approval.

The respective credit policies of the subsidiaries also define the collaterals acceptable for their respective credit facilities with the ratios for coverage, top-up and liquidation. However, unlike the laws of Kuwait, the laws in the jurisdictions of the subsidiaries permit hypothecation of immovable properties of clients in favour of a bank and where this is permitted, such collateral is also obtained, subject to the conditions stipulated in the respective legal provisions. Based on their respective local regulatory requirements and banking practices, the collaterals are valued by independent sources.

B. Market Risk

i. Strategies and Processes

The operations of the Bank’s Treasury and Investment Banking Group give rise to the market risks assumed by the Bank. The Bank has a well-defined and CBK compliant Treasury, liquidity and investment Policies that outlines its risk appetite in regard to undertaking transactions that result in exposures to market risk. Being a specialised area that requires particular knowledge of the market and various products and players therein, the policy document is prepared by the Treasury Group with inputs/concurrence from the Risk Management, under the guidance and approval of the Board. These Policies covers rules concerning the positions that the Bank assumes in the course of its trading in foreign exchange, equities and fixed-income securities as also the interest rate risk positions of its banking book in terms of mismatches in maturity and/or re-pricing periods. The strategies that the Treasury Group plans to adopt during the coming year are decided on the basis of market forecasts that are made at the time of preparation of the annual budget. These are, on an ongoing basis, discussed at the Asset Liability Committee (ALCO) meetings and corrective actions, if any, are decided at these meetings. These meetings are chaired by the Chief Executive Officer and are convened by the Market Risk Controller in the Risk Management Group. The ALCO discusses and deliberates on all aspects of market and liquidity risks.

The subsidiaries have their respective well defined ALCO policies with a similar content of topics, but suited to their respective business environments. These ALCO policies have been framed with due consideration for the respective local regulations that have an effect on the market risks assumed by each of them.

The Treasury group, in consultation with the Risk Management, lays down the various limits and rules under which the members of the Treasury Dealing Room are allowed to take up positions. These limits are approved by the Board Executive Committee and where so required under the regulations, also by CBK. These limits relate to intra-day and overnight positions as well as positions under different maturity buckets, counterparty exposure limits, stop-loss levels etc. While the adherence of these limits is monitored by the Head- IBT, Private and Retail Banking, they are also independently monitored

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by the Market Risk Controller whose office is located in the dealing room but reports to the Group Chief Risk Officer. The Market Risk Controller reports relevant information on the treasury activities of the Bank including the various positions taken by the Treasury to the Group Chief Risk Officer on a daily basis or more frequently if necessary.

While quantifying market risks, the Bank considers risks arising out of movements in interest rates (for each of the currencies in which it holds positions), foreign exchange and price of trading investments. As stated earlier, the Bank does not assume positions in commodities. Based on the composition of the risk assets that give rise to these risks, the bank applies internal rules to determine the value at risk. These are in line with the applicable regulatory guidelines and are considered commensurate with the positions assumed by the bank from time to time. These positions are marked to market at regular intervals as prescribed by the regulatory guidelines and these valuations are independently computed/ verified by the Middle Office of the Bank. Middle Office has no reporting relationship to the Front Office that assumes and manages these positions.

As regards the subsidiaries, as stated above, the operations in the area of foreign exchange trading are governed by the applicable local regulations for each of them. These banks also have various regulatory limits on their dealing activities and open positions. These banks however have their back office/middle office functions with reporting lines outside the front office. The Market Risk section under the Risk Management monitors the market risks arising from all treasury activities including investments.

a. Scope and Nature of Reporting Systems

The Bank has in place software systems that allow independent, on-line monitoring of the intra-day positions from outside the dealing room. This system also enables the Market Risk Controller to monitor the activities of the various members of the Treasury Dealing Room simultaneously as the dealing transactions are made.

b. Hedges and Mitigants

A major part of the banking and trading books of the Bank is in Kuwaiti Dinars (KD’s), the other important currencies being the internationally actively traded currencies. Due to the limited scope for hedging interest rate positions in KD’s arising from a limited range of hedging products, the Bank enters into, where reasonably possible, variable interest rate transactions structured to enable it to minimise maturity/re-pricing mismatches. As regards the other currencies, the open positions taken by the Bank are within pre-set limits and tenors for the respective currency. The Bank also makes use of interest rate and currency swaps to hedge its interest rate and currency positions in foreign currencies. The Bank normally makes use of derivatives for hedging purposes and also meets the requests of its clients for derivative products on a fully matched basis. However, the Bank only deals in or offers to its clients, simple derivatives such as forward foreign exchange contracts and does not handle the more sophisticated derivatives including structured derivatives.

As regards the subsidiaries, with the exception of BBT other entities do not actively take proprietary trading positions The range of products offered by them to their clients is also limited, due to the market environment and where applicable, exchange control regulations.

BBT deals in FX derivatives and interest rate derivatives to cover client needs on a back to back basis as well as for proprietary activities. All derivatives activities are regulated through limits approved by the BOD and monitored through bank systems.

C. Operational Risk

a. Strategies and Processes

The Operational Risk Department is controlled by the Head of Operational Risk , who reports to the Group Chief Risk Officer. This department oversees the operational procedures and controls with a view to identifying the areas of weakness in the operating procedures and processes of the various operating departments of the Bank and correcting them from time to time. The Risk and Disclosure Policy of the Bank classifies the various areas of operational risks and identifies specific officers who are primarily responsible for rectifying these risks. Thus, for example, the rectification of legal risks falls under the direct responsibility of the Chief Legal Officer whereas the rectification of Information Technology (IT) risks falls under the responsibility of the Chief Information Technology Officer. The specific procedural guidelines for all departments under the Operations Group are overseen by the Head of Operational Risk who also collates various incidents that give rise to operational risks, an actual or potential loss situation.

For the purpose of separation of the functions of IT development/operations from IT Security, Head of Operational Risk is also responsible to independently ensure the adequacy and effectiveness of IT security systems and procedures. These include both internal and external IT security measures. While a similar organisation is available in some of the subsidiaries, others are in the process of setting up such an organisation. However, the IT Security function is separate from the IT development/operations.

The Bank has a robust and well defined Business Continuity Program, which comprises of policies and procedures with clearly defined roles, responsibilities and ownership for Crisis Management, Emergency Response, Business Recovery and IT Disaster Recovery Planning. The Bank’s BCP steering committee, represented by the senior executive Management of the Bank, approves and oversees the annual BCP strategy and road map. Burgan Bank’s Business Continuity Management Program is designed to ensure the continuity of bank’s critical businesses at a minimum loss, in case of a disaster and a emergency that may impact the bank or a national event and may shutdown the whole country or part of it in case of any eventuality. Burgan Bank has a dedicated Disaster Recovery & Business Continuity Recovery site within Kuwait, which would be active in case some parts and specific areas in Kuwait are impacted. To respond to a country wide shutdown a fully operational data back-up site and a Crisis Command Centre outside Kuwait is functional. Should any contingency arises, the key pre-identified bank staff would

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relocate locally or internationally to render crucial services to the esteemed clients and partners during a crisis/disaster. Regular drills and tests are conducted to cover all aspects of the Business Continuity Plan. Some of the subsidiaries have documented their business continuity and recovery plans, others are in the process of formulating ad implementing the same.

b. Structure and Organisation

The various operational functions of the Bank come under the Operations Group headed by the Chief Operating Officer (COO) who oversees the day-to-day operational and support functions. In order to ensure the independence of the various operating departments, the COO reports to the Group Chief Operating Officer (GCOO) who in turn directly reports to the Chief Executive Officer. Also, the processing of the various transactions is governed by Standard Operating Procedures (SOPs) laid down for each of the operating departments with the necessary inputs/concurrence from, among others, Head of Operational Risk

Such an organisation with an independent head of operations reporting to the respective chief executive officers is in place in the subsidiaries also.

c. Scope and Nature of Reporting Systems

As regards the scope and nature of risk reporting in this area, the Bank has laid down a Risk and Control Self assessment program as well as Internal Control Charts (ICCs) that are required to be submitted by the various functionaries with differing periodicities. These are required to be submitted to a specified supervisors who conduct the necessary follow up in regard to exceptions and ensure corrective action. The ICCs cover all the branches and operating departments in the head office.

The subsidiaries are in the process of introducing ICCs with suitable modifications to suit their respective local needs. Also, some of the subsidiaries have in place a Risk and Control Self assessment covering several functions.

d. Hedges and Mitigants

The Bank has set up an Incident Management System (IMS) under which various incidents of operational risks are noted and registered with all the relevant details. These incidents may relate to either actual or potential loss resulting from an operational failure or dysfunction, either due to external or internal causes. These incidents are analysed to effect necessary changes in the SOPs so as to enhance the operational controls and to eliminate or minimise the operational loss. These incidents are, at appropriate intervals, reported to the top management of the Bank and the appropriate Board Committee.

The Bank has also developed Risk Dashboards in some of its operational areas which serve to provide a snapshot of the concerned units in regard to the operational risks in these operating units.

These tools, viz. the Risk Dashboards and IMS are also in the process of being implemented in the subsidiaries.

6. Credit Exposures

i. Definition of Past Due and Impaired Assets

In regard to income recognition, asset classification and provisioning requirements, the Bank, as a matter of policy, follows the relevant regulations of CBK. Where considered appropriate for reasons of prudence, a more conservative policy is followed in regard to the amounts of loan loss provisions than those calculated by using the norms laid down in these regulations. The Bank considers an asset or an exposure to be impaired if, in its opinion, the realisable value of the asset or the exposure is less than the value at which it is carried in the books of the Bank before it considers the necessity of making a specific provision for the same. As defined under the regulations of CBK, a past due exposure is considered to be one where the client or counterparty has failed to meet his contractual obligation to the Bank towards payment of the interest or the principal or a part thereof on the date on which such payment is due. Thus, if a client is required to pay interest at monthly rests and if the interest is not paid upon its debit to the account on the first day of the following month, the loan is considered to be past due. Similarly, if the principal amount of the loan or an installment thereof is not paid on the day it falls due for payment under the contract entered into by the client with the Bank, such loan is considered as past due from the next day. However, as is the international practice in the banking industry and as laid down under the CBK regulations, an exposure is considered as non-performing if it continues to remain past due for more than 90 days. In respect of retail banking loans, an asset is considered as non-performing if more than 3 installments remain unpaid. In all such cases, the exposure will be considered to be impaired.

The subsidiaries also apply such prudent policies which are in line with the relevant regulations in their respective jurisdictions. Additionally, the subsidiaries also follow the rules laid down by their respective regulatory authorities.

ii. Approaches for Specific and General Provisions

As required under the CBK regulations, the Bank maintains two types of loan loss reserves. On the Bank’s exposure to non-bank clients and counterparties which are not covered by collateral in the form of cash or demand/term deposits with the Bank, the Bank was required to maintain a general provision of 2% of the outstanding exposure, both on and off-balance sheet. If the exposure to a third party is covered by the guarantee of a bank that is rated below ‘A’, in such cases also, the Bank was required to maintain a general provision of 2% of the outstanding exposure. However, with effect from 12.03.07, the CBK amended these rules and banks in Kuwait are, after that date, required to maintain only 1% (instead of 2%) general reserve in respect of cash exposures and 0.5% for non-cash exposures. The past level of general provisions as of 31.12.2006 however cannot be reversed unless, under special circumstances, CBK approval is obtained for the same. The Bank has not reversed any past provision in this regard. Out of the general provision so maintained, a sum equal to 1.25% of the RWA in the case of on-balance sheet exposures and after the application of Credit Conversion Factors and Risk Weights for off-balance sheet exposures is considered to be part of the

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Tier 2 capital of the Bank and the remaining amount is given the same treatment for the purpose of CRAR as if it was a specific provision, i.e., it is reduced from the RWA of the Bank.

In regard to impaired assets, the Bank determines the necessary level of specific provision in terms of the norms laid down under the CBK regulations. These regulations require the Bank to make a provision of at least 20% of the value of the exposure (net of the value of eligible collateral as defined therein) if it remains past due for more than 90 days but less than 180 days, 50% if the period of past due is more than 180 days but less than 1 year and 100% if the past due period exceeds 1 year. However, based on the circumstances of a particular exposure, if and when the Bank considers it necessary, a higher level of provisioning is made even if these default periods are not attained.

In all cases of non-performing exposures, the Bank does not recognise any accrued income. Interest/commission on such exposure is recognised as income only on actual receipt.

The Loan Review and Provisioning Committee of the Bank examines, at monthly intervals, all the delinquent accounts to determine if a specific provision needs to be made for any particular account. The Committee is chaired by the Chief Executive Officer or in his absence, by the GCOO to ensure an objective assessment of the concerned exposure without taking into consideration the performance of the Bank or its profits/profitability.

The subsidiaries follow their respective applicable regulations in regard to impaired assets and provisioning requirements. However, at the time of consolidation of the accounts, The Bank applies the CBK rules in regard to provisioning on the consolidated basis. Any shortfall arising on account of the difference between the respective regulatory requirements of a subsidiary and the CBK regulatory requirements are covered by the Bank at the consolidated level.

iii. Credit Risk Management Policy

In regard to the credit portfolio of the Bank, the Credit Policy, as stated earlier, defines the risk appetite of the Bank. The Bank gives, in addition to the financial position of the client/counterparty, due consideration to the sector of activity of the client/counterparty, the exposure of the Bank to the group to which the client/counterparty belongs, the quantum of exposure vis-à-vis the capital funds of the Bank, the country of origin of the main cash flow of the client/counterparty, the nature of credit facilities, their purpose and the source of repayment and any other considerations that are essential for the credit assessment. The availability or otherwise of acceptable collateral, the standing and reputation of the client/counterparty, market reports, the exposures assumed by other banks on the same client/counterparty etc. are some of the considerations that are examined before approving credit facilities. As a rule, all credit exposures are reviewed at least once in a year. In the case of locally incorporated unlisted companies and partnerships with limited liability, the personal guarantees of the main promoters of the enterprise are normally also required.

Since the Bank is at present required to follow the Standardised Approach for credit risk, it does not follow any statistical methods to estimate either the probability of default or exposure at default or loss given default. Based on the public ratings given to the clients/counterparties by recognised and approved External Credit Assessment Institutions (ECAIs), the exposures are risk weighted in accordance with the CBK regulations.

iv. ECAIs and Mapping Process

An exercise to map these ratings to the exposure of the Bank where applicable is carried out. Where a general issuer rating is available, the same is used for the relevant exposure of the rated client/counterparty. Where only an issue rating is available, if the rated issue has comparable characteristics to the Bank’s exposure both in terms of the tenor and other features such as availability of credit enhancement etc. such rating is considered. CBK at present considers Moody’s, Standard and Poor’s and Fitch as the Approved ECAIs and only those clients/counterparties who have a solicited rating from one or more of these ECAIs, are considered to be rated. Based on the rating systems as declared by the ECAIs, the ratings are classified into Investment Grade and Non-Investment Grade ratings. Those who are not rated by any of these three ECAIs are considered to be unrated. In order to ensure that the ratings are not considered selectively, if a current rating from one of these ECAIs available in respect of any client/counterparty, it is always taken into account and in such cases, the client/counterparty is not considered as unrated.

Table IV – Credit Risk Exposure KD’000s

Gross credit exposure

Gross average credit exposure*

Funded Unfunded Funded Unfunded

Claims on sovereigns

1,273,515 10,970 1,121,708 4,872

Claims on public sector entities

101,634 21,440 103,025 22,276

Claims on banks 1,125,116 425,273 1,046,247 265,276

Claims on corporates

2,094,243 1,664,086 1,969,088 1,632,963

Cash items 124,746 – 124,267 –

Regulatory retail exposures

561,803 43,018 549,099 45,164

RHL Eligible for 35% RW

14,965 – 13,198 –

Past due exposures

120,595 558 268,374 331

Other exposures (Note 1)

1,793,010 59,118 1,278,308 37,198

Total 7,209,627 2,224,463 6,473,314 2,008,080

* Average exposure represents daily average outstanding except in the case of past due exposures, which show quarterly averages since the classification of past due exposures is done quarterly.

Note 1: Other exposures includes Loans to Real Estate Activity and Share financing; These attracts a risk weight of 150% based on Central Bank of Kuwait Circular (2/RB/220/2008) dated 12 May 2008

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Table V – Geographic Distribution Of Gross Credit ExposuresKD’000s

Kuwait Jordan Algeria Iraq Tunisia Turkey Other Middle East

Europe Rest of the world

Total

Claims on sovereigns 406,527 320,370 137,601 228,535 – 174,235 16,648 569 – 1,284,485


6,205 102,588 – – – – 14,281 – – 123,074

Claims on banks 238,600 11,127 231 24,500 27,230 67,058 488,563 431,446 261,634 1,550,389

Claims on corporates 1,654,041 476,640 535,652 71,524 9,776 979,175 24,392 3,019 4,110 3,758,329

Cash items 38,260 15,384 31,520 34,524 252 4,058 327 16 405 124,746


393,421 24,536 21,701 37,475 751 126,879 – 58 – 604,821

RHL Eligible for 35% RW – 14,965 – – – – – – – 14,965

Past due exposures 76,087 17,325 5,244 9,268 571 7,169 5,489 – – 121,153

Other exposures (Note 1) 1,260,857 112,238 56,016 35,891 11,474 246,671 35,589 6,556 86,836 1,852,128

Total 4,073,998 1,095,173 787,965 441,717 50,054 1,605,245 585,289 441,664 352,985 9,434,090

Note 1: Other exposures includes Loans to Real Estate Activity and Share financing; These attracts a risk weight of 150% based on Central Bank of Kuwait Circular (2/RB/220/2008) dated 12 May 2008.

Table VI – Gross Credit Risk Exposures By Residual Contractual Maturity KD’000s

Up to 3 months

3 to 6 months

6 to 12 months

Over 12 months

Total

Claims on sovereigns

605,392 109,516 124,083 445,494 1,284,485


– – – 123,074 123,074

Claims on banks

951,491 189,238 200,232 209,428 1,550,389


857,335 483,576 589,446 1,827,972 3,758,329

Cash items 124,746 – – – 124,746


81,156 33,838 44,798 445,029 604,821

RHL Eligible for 35% RW

– – – 14,965 14,965

Past due exposures

121,153 – – – 121,153


418,690 196,210 104,220 1,133,008 1,852,128

Total 3,159,963 1,012,378 1,062,779 4,198,970 9,434,090


Table VII – Impaired Loans And Provisions By Standard Portfolio KD’000s

Impaired loans (net of suspended

interest and collateral)

Total provision

Specific provision charge / charge off

(-)

Claims on banks 1,833 4,885 705


62,549 188,540 39,829


12,808 21,315 4,464


990 17,746 2,801

Total 78,180 232,486 47,799

Note 1: Other exposures includes Loans to Real Estate Activity and Share financing; These attracts a risk weight of 150% based on Central Bank of Kuwait Circular (2/RB/220/2008) dated 12 May 2008..

Table VIII – Geographic Distribution Of Impaired Loans (Net)KD’000s

Kuwait Jordan Algeria Iraq Tunisia Turkey Other Middle East

Europe Rest of the world

Total

Claims on banks – – – – – – 1,833 – – 1,833

Claims on corporates 16,799 26,658 6,990 11 370 11,310 411 – – 62,549


9,930 865 681 1,223 – 109 – – – 12,808

Other exposures (Note 1) 990 – – – – – – – – 990

Total 27,719 27,523 7,671 1,234 370 11,419 2,244 – – 78,180


Table IX – Reconciliation Of Changes In Provisions KD’000s

Funded Unfunded Total

Provisions as on 1 January 2013 181,542 22,218 203,760

Exchange adjustment (5,746) (416) (6,162)

Amounts written off (55,025) – (55,025)

Charge to statement of income 95,302 (5,389) 89,913

Provisions as on 31 December 2013 216,073 16,413 232,486

46

driven by you

7. Credit Risk Mitigation (CRM)

The main CRM techniques applied by the Bank are based on eligible collaterals. Cases where the guarantee of a better-rated client/counterparty is obtained for exposures to a lower rated client/counterparty are few, mainly due to the limited number of Kuwaiti and other regional corporates for which ratings by approved ECAIs are available. In cases where specific pledge or blocking of deposits is available, on and off- balance sheet netting is also used to mitigate client risks.

i. On and Off-Balance Sheet Netting

The generic legal documents that the Bank obtains from its clients normally include a clause that permits the Bank to offset the client’s dues to the Bank against the Bank’s dues to the client. Thus, if the same legal entity that has obtained credit facilities from the Bank also maintains credit balances in its accounts, the Bank would normally have the legal right to set off the credit balances against its dues. In respect of some counterparty banks, there are specific agreements that provide for netting on and/or off-balance sheet exposures. Additionally, in specific cases, the Bank approves credit facilities to a client against pledge/block of his deposits to cover the whole or part of his dues.

For the purposes of computation of CRAR (also for calculation of general provisions), as a prudential measure, the Bank does not take into account the general lien available to it under the generic documentation but only considers cases where specific pledge/block of deposits is in place.

ii. Collateral Policy

It is the Bank’s endeavour to obtain acceptable collateral cover for its exposures as far as commercially practicable. The collateral normally consists of real estate properties, shares listed in Kuwait and other leading stock exchanges, other traded and untraded securities such as bonds, mutual funds etc. In some cases, in order to ensure the promoter’s commitment, the Bank also obtains other forms of collateral such as unlisted shares/securities etc. but these securities of course are not considered for CRM purposes. While the Bank will be willing to accept other eligible collaterals as defined by the CBK such as gold, eligible debt instruments etc. these are not generally offered by clients/counterparties to the Bank. Accordingly, the eligible collateral predominantly consists of shares listed and traded on the recognised stock exchanges which form part of their respective main indices and eligible real estates as per CBK rules.

Under Kuwaiti laws, the repossession and enforcement of a mortgage on the primary residence of a borrower is not permitted except under specific conditions. The bulk of the residential mortgage loans of the Bank in its Retail Banking Group are therefore not considered to be collateralised by the primary residence, even though mortgage documents are obtained from some of the clients.

Only in some cases, where the legal conditions for enforcement are fulfilled, these are considered to be retail exposures collateralised by residential mortgages and are applied the relevant weight.

However, as regards the subsidiaries, the respective local laws do not pose any constraints on enforcement of the mortgage on the primary residence and hence these constraints do not apply in their cases.

iii. Main Types of Collateral

The Credit Policy of the Bank defines the types of collateral that are acceptable and the collateral coverage ratio, which is the ratio of the value of the collateral to the exposure, for each type of acceptable collateral. The policy also stipulates that the terms of credit facilities should stipulate a top-up level. If the value of collateral falls to a level where the actual coverage available breaches the top-up level, the client is required to either lodge additional collateral or reduce his outstanding dues accordingly. If the client fails to do either of these and the value of collateral falls further, the terms also stipulate a liquidation threshold, which is the level of coverage at which the Bank may proceed to liquidate the collateral to realise its dues. These various ratios, after approval, are monitored independently by the Credit Control unit and reported to the concerned business group for follow up with the client.

iv. Collateral Valuation and Management

The Bank follows a system under which the collateral valuation is independently verified. In respect of real estate accepted as collateral, the valuation is done on an annual basis by two independent valuers, one by a valuer approved by Central Bank of Kuwait and another by a registered valuer approved by the Bank and the average of two values being considered for risk mitigation. In respect of shares and other securities listed on the Kuwait Stock Exchange, the valuation is computed daily, based on the prices declared by the Stock Exchange at the end of the day. The valuation of other collateral such as unlisted shares is done on such bases as may be considered appropriate, on a case-by-case basis. The valuation process is handled by the Credit Control unit of the Bank with no involvement of the concerned business group who are kept informed of the value of client collateral.

v. Guarantees for Credit Enhancement

As stated earlier, there are very few cases where guarantee of a better-rated entity is obtained for the exposure to a lower rated entity. In these cases, where the rating is given by an approved ECAI, the guarantor’s rating is substituted in place of the rating of the borrower, for the purpose of computation of RWAs. Where the guarantor and/or the borrower are/is not rated by an approved ECAI, the Bank uses its internal assessment to determine the acceptability of the guarantee but for the purpose of computation of RWA, this has no effect.

vi. Concentration

The Bank makes an endeavour to avoid concentration of collateral as far as possible. To this intent, when collateral in the form of listed shares is accepted, the year-to-date daily traded volumes of the concerned share and the average number of trades are examined and these are, among other

47

points, taken into consideration in making a decision to accept the collateral and stipulating the concerned threshold ratios stated above, viz. coverage ratio, top-up ratio and liquidation ratio. The Bank classifies listed shares into various categories based on the liquidity and volatility of the concerned share, derived from the data available with the Kuwait Stock Exchange. The ratios stated above would vary depending on the classification of the shares.

8. Market Risk For Trading Portfolio, Foreign Exchange And Commodities Exposures

The Bank applies the Standardised Approach for computing the market risk on its trading portfolio and at present does not use the Internal Model Approach (IMA). Under the Standardised Approach, the risk exposure is quantified according to the levels stipulated by CBK.

9. Operational Risk

As stipulated by CBK, the Bank uses the Standardised Approach for computation of Operational Risk and the capital required for the same. Out of the eight business lines defined by CBK, the Bank’s operations are confined only to five, and the Bank does not presently operate in Corporate Finance, Agency Services and Retail Brokerage. For the remaining business lines, the Bank uses the stipulated beta factors. Additionally, as stated earlier, the Bank has put in place an Incident Management System to track operational risk incidents and eventually, the system is expected to assist the Bank develop a more advanced approach for operational risk, if and when this is approved or mandated by the authorities. Also, the Bank uses ICCs as a control tool in respect of operational risks. The risk dashboards give a view of the areas of operational risk to the senior management of the Bank and the Board.

The subsidiaries which are under Basel II apply the Basic Indicator Approach for computing operational risk under their respective local regulations. However, during the consolidation process, the operational risks are considered under the Standardised Approach where the activities of the subsidiaries are considered under the various business lines as stipulated under the CBK regulations on Basel II calculations.

10. Equity Position In The Banking Book

i. Classification of Investments

The Bank consolidates the assets and liabilities of its five subsidiaries, viz. Bank of Baghdad, Gulf Algeria Bank, Jordan Kuwait Bank, Tunis International Bank and Burgan Bank Turkey. The Bank’s investments are classified as either ‘Available for Sale’, ‘Held to Maturity’, ‘At fair value through income statement’ or ‘Held for Trading’. Investments in equities that are acquired principally for the purpose of selling in the short term or, if they are managed and their performance is

Table X – Net Credit Exposure After Risk Mitigation And Credit Conversion Factor

KD’000s

Before CRM CRM Net Exposure

Claims on sovereigns 1,276,155 60 1,276,095


105,934 41 105,893

Claims on banks – Rated 944,782 – 944,782

Claims on banks – Unrated 212,335 – 212,335

Claims on corporates 2,563,868 475,291 2,088,577

Cash items 124,746 – 124,746

Regulatory retail exposures 579,790 27,663 552,127

RHL Eligible for 35% RW 14,965 7,283 7,682

Past due exposures 120,855 64,365 56,490


1,821,832 687,948 1,133,884

Total 7,765,262 1,262,651 6,502,611


Table XI – Exposure covered by eligible collateral and guarantee KD’000s

Covered by:

Exposure after CCF, net of Suspended

Interest

Financial collateral after application of

haircuts as stipulated by CBK

Claims on sovereigns 1,276,155 60


105,934 41

Claims on banks 1,157,117 –

Claims on corporates 2,563,868 475,291

Cash items 124,746 –


579,790 27,663

RHL Eligible for 35% RW 14,965 7,283

Past due exposures 120,855 64,365

Other exposures (Note 1) 1,821,832 687,948

Total 7,765,262 1,262,651


Table XII – Capital Requirement for Market Risk KD’000s

Equity position risk 964

Foreign exchange risk 2,917

Interest rate position risk 803

Options 387

Total 5,072

48

evaluated on reliable fair value basis in accordance with the documented investment strategy, are classified as at fair value through income statement and all other investments are classified as available for sale. The Bank has an Investment Policy that outlines the type of investments, the accounting requirements, the risk appetite for investments etc.

ii. Accounting Policy and Valuation Methodology

The accounting policies concerning investments and their valuation methodologies are described in detail under the “Summary of Significant Accounting Policies” elsewhere in this Annual Report. During the year 2013, there has been no significant change in these policies and methodologies.

The Bank’s Investment Committee examines proposals for investments that come from the Investment Department which is under the Head- IBT, Private and Retail Banking. The Committee deliberates on these proposals before sending them for the final decision of the Board Executive Committee. The Investment Committee also takes a view on appropriate classification of the concerned investment, based on the Bank’s objective in making the investment.

As regards the subsidiaries, they also have their respective investment policies on the above lines, which of course, are in line with their applicable regulatory requirements.

11. Interest Rate Risk In The Banking Book (IRRBB)

The interest rate risk on the banking book arises due to maturity/re-pricing mismatches of the assets and liabilities in the banking book. For the purpose of monitoring such interest rate risk, the Bank has in place a system that tracks the residual contractual maturities of all its interest bearing assets and liabilities as also their re-pricing periods. From such data, a cash flow is prepared showing the relevant mismatches in re-pricing periods, classified into various maturity buckets. The interest rate cash flow disregards any non-interest bearing assets and liabilities since they do not affect the IRRBB. However, these are assumed to re-price on an overnight basis to provide for their replacement by interest bearing liabilities or assets.

All non-maturity deposits are considered repayable on demand and are accordingly placed in the overnight maturity bucket as required under CBK regulations. Due to this prescription in the CBK rules that the banks must follow, all non-maturity deposits are assumed to be re-priced the next day, instead of their placement in buckets based on a behavioural/trend analysis of such deposits. Certain details related to IRRBB are prepared and presented at the monthly meetings of the ALCO, which also deliberates in the matter.

For an even 25/50/100 basis point shock along the yield curve, net interest income for one year (from Jan. to Dec. 2014) including derivatives is affected as shown below:

The mid-year interest rate sensitivity analysis conducted by the Bank indicated that for an even increase in interest rates by 100 basis points (1%) the annual interest income of the Bank would have gone up by 14% whereas an even reduction in interest rates by the same level would have resulted in a reduction of net interest income by 14%. Since the banking book is predominantly in KD’s, this exercise is conducted on the consolidated book. This analysis is now being conducted at monthly intervals.

JKB conducts its interest rate sensitivity taking an interest rate movement of 100 basis points. Currently, the other subsidiaries do not conduct such an exercise.

48

Table XIII – Investments KD’000s

Publicly traded Privately held

Equities 27,614 73,255

Fixed income instruments 213,286 26,154

Any other investments 12,141 68,952

Total 253,041 168,361

Capital requirement by equity groupingsKD’000s

Investments available for sale 36,753

Investments held to maturity 2,512

Investments designated through profit & loss 8,370

Investments held for trading 2,604

Investment in associates 8,168

Total 58,407

Realised gains/(losses) recorded in the income statement

7,398

Unrealised gains/(losses) recognised in the shareholder’s equity

7,047

45% of the above included in Tier 2 Capital 3,171

40,00045,000

50,000

35,000

30,000

20,00025,000

15,000

10,000

85,00090,000

95,000

80,000

75,000

65,00070,000

60,000

55,000

5,000

(5,000)

(10,000)

(15,000)

–

50%

55%

45%

40%

30%

25%

35%

20%

15%

KD

000

Down 100 Down 50 Down 25 BB Consolidated Up 25 Up 50 Up 100

64,848 70,217 72,899 75,583 78,267 80,949 86,318

(10,735) (5,366) (2,684) – 2,684 5,366 10,735

-14% -7% -4% 0% 4% 7% 14%

Net Int. Inc. Forecast Earnings at Risk Earnings at Risk %

10%

0%

-5%

5%

-10%

-15%

Impact of interest rate change on earnings

49

12. Overview And Conclusion

It is considered by the Board and Management of the Bank that, as at the end of 2013, the institution has in place a management, control and evaluation system that is:

• Responsive to present business environment, the bank’sgrowth plans and the attendant risks,

• Compliantbothwithhistoricregulatoryinstructionsandinconformity with the enhanced Basel II driven requirements detailed by CBK in their December 2005 instruction document and further enhancements to the same issued from time to time including the detailed additions on Pillar 2 matters, and

• Meetsgenerally accepted international riskmanagementstandards for a financial institution of the size and complexity of the Bank.

The Bank also appoints an independent audit firm other than its external auditors, to examine the internal control systems in the Bank and its subsidiaries and to point out any deficiencies that may give rise to risks. This is being done in fulfilment of the CBK regulations and a copy of these reports along with the steps taken to correct any deficiencies is presented to the Board Audit Committee and also to CBK. This provides additional comfort regarding the checks and balances in place in the Bank and its subsidiaries.

The Bank now has in place relevant policies and detailed procedures for all its major departments/functions aimed to achieve full operational conformity with the policies set out in this section in an integrated and cost efficient manner. In this regard,

• Detailed operating procedures are in place in respect ofall major functions and the concerned staff members may refer to them as and when necessary so as to ensure their compliance

• Internal Control Charts of different periodicities are inplace in all its major functions that enable the respective supervisory employees to follow and exercise control over the aspects covered by these charts

• The Bank’s IT security and control structure has beeneffectively functioning and is certified under an international information security certification.

• Anindependentinternalauditfunctionhasregularboardapproved audit plans to audit the various areas of the bank and present their findings and the responses of the audited departments including the steps taken to address audit observations.

The Bank Management will continue to review the policies and procedures on an ongoing basis periodically for necessary and appropriate enhancements, and present them for approval by Board Committees and/or the Board itself as required by the Bank’s Governance structure and, where applicable, CBK guidance.

How to obtain our 2013 Financial Statements:

n Shareholders attending our General Assembly meeting will be provided with a draft printed copy of the Financial Statement for their approval.

n Shareholders can request a printed copy of the Financial Statement to be sent to them by courier seven days before the advertised date of the General Assembly. Please call +965 2298 8000 to arrange this.

n Shareholders can request a copy of the Financial Statement to be sent to them by email seven days before the advertised date of the General Assembly. Please send an email request to [email protected] to arrange this.

n Shareholders can download a PDF copy of the Financial Statements seven days before the advertised date of the General Assembly from our company website – www.burgan.com

For further information on our 2013 Financial Statement, please telephone +965 2298 8000.

driven by youA member of the KIPCO Group

50

Report on the Consolidated Financial StatementsWe have audited the accompanying consolidated financial statements of Burgan Bank S.A.K.P. (the “Bank”) and its subsidiaries (collectively “the Group”), which comprise the consolidated statement of financial position as at 31 December 2013 and the consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in shareholders’ equity and consolidated statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information.

Management’s Responsibility for the Consolidated Financial StatementsManagement is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as adopted for use by the State of Kuwait, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ ResponsibilityOur responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ 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, the auditors 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 policies used and the reasonableness of accounting estimates made by the 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.

Ernst & Young Al Aiban, Al Osaimi & PartnersP.O. Box 74, Safat 13001, KuwaitBaitak Tower, 18-21st FloorSafat Square, Ahmed Al-Jaber StreetTelephone (965) 2295 5000Facsimile (965) 2245 6419Email: [email protected]/mena

OpinionIn our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Group as at 31 December 2013, and its financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted for use by the State of Kuwait.

Report on Other Legal and Regulatory RequirementsFurthermore, in our opinion proper books of account have been kept by the Bank and the consolidated financial statements, together with the contents of the report of the Bank’s Board of Directors relating to these consolidated financial statements, are in accordance therewith. We further report that we obtained all the information and explanations that we required for the purpose of our audit and that the consolidated financial statements incorporate all information that is required by the Capital Adequacy Regulations issued by the Central Bank of Kuwait (“CBK”) as stipulated in CBK Circular number 2/BS/184/2005 dated 21 December 2005, as amended, the Companies Law No 25 of 2012, as amended, and by the Bank’s Memorandum of Incorporation and the Articles of Association, that an inventory was duly carried out and that, to the best of our knowledge and belief, no violations of the Capital Adequacy Regulations issued by the CBK as stipulated in CBK Circular number 2/BS/184/2005 dated 21 December 2005, as amended, the Companies Law No 25 of 2012, as amended, or of the Bank’s Memorandum of Incorporation and Articles of Association have occurred during the year ended 31 December 2013 that might have had a material effect on the business of the Group or on its consolidated financial position.

We further report that, during the course of our audit, we have not become aware of any violations of the provisions of Law No. 32 of 1968, as amended, concerning currency, the CBK and the organisation of banking business, and its related regulations during the year ended 31 December 2013 that might have had a material effect on the business of the Group or on its consolidated financial position.

INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERS OF BURGAN BANK S.A.K.P.

Deloitte & Touche, Al-Wazzan & Co.Ahmed Al-Jaber Street, SharqDar Al-Awadi Complex, Floors 7 & 9P.O. Box 20174, Safat 13062 orP.O. Box 23049, Safat 13091 KuwaitTelephone (965) 2240 8844, 2243 8060Facsimile (965) 2240 8855, 2245 2080www.deloitte.com

Waleed A. Al Osaimi Bader A. Al WazzanLicence No. 68 A Licence No. 62 AErnst & Young Deloitte & Touche(Al Aiban, Al Osaimi & Partners) (Al-Wazzan & Co.)

23 January 2014Kuwait

51

BURGAN BANK GROUP

The attached notes 1 to 24 form an integral part of these consolidated financial statements. 3

Consolidated Statement of Financial Position As at 31 December 2013 (Restated) 2013 2012 Notes KD 000’s KD 000’s ASSETS Cash and cash equivalents 3 1,004,290 787,468 Treasury bills and bonds with CBK and others 583,647 483,588 Due from banks and other financial institutions 4 700,083 610,780 Loans and advances to customers 5 3,954,848 3,374,836 Investment securities 6 421,402 311,021 Other assets 7 238,138 157,130 Property and equipment 81,378 69,130 Intangible assets 8 170,965 178,985

───────── ───────── TOTAL ASSETS 7,154,751 5,972,938

═════════ ═════════

LIABILITIES AND SHAREHOLDERS’ EQUITY

LIABILITIES Due to banks 568,561 311,634 Due to other financial institutions 880,492 713,253 Deposits from customers 4,640,084 3,895,116 Other borrowed funds 10 227,597 230,985 Other liabilities 11 218,190 202,119

───────── ───────── TOTAL LIABILITIES 6,534,924 5,353,107

───────── ───────── SHAREHOLDERS’ EQUITY Share capital 12 162,222 154,497 Share premium 12 129,559 129,559 Treasury shares 12 (37,683) (36,688) Statutory reserve 12 53,480 51,414 Voluntary reserve 12 53,858 51,792 Treasury shares reserve 12 36,554 36,554 Investment revaluation reserve 7,047 11,091 Share based compensation reserve 564 564 Foreign currency translation reserve (17,372) (1,753) Other reserves 554 554 Retained earnings 86,675 93,141

───────── ───────── Equity attributable to the equity holders of the Bank 475,458 490,725 Non controlling interests 144,369 129,106

───────── ───────── TOTAL SHAREHOLDERS’ EQUITY 619,827 619,831

───────── ───────── TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 7,154,751 5,972,938

═════════ ═════════ ___________________________ ________________________ Khalid Al Zouman Eduardo Eguren Linsen Chief Financial Officer Chief Executive Officer ___________________________ Majed Essa Al Ajeel Chairman

BURGAN BANK GROUP



───────── ───────── TOTAL ASSETS 7,154,751 5,972,938

═════════ ═════════









52

BURGAN BANK GROUP


Consolidated Income Statement For the year ended 31 December 2013

2013 2012 Notes KD 000’s KD 000’s Interest income 270,375 190,903 Interest expense (104,940) (71,963)

───────── ───────── Net interest income 165,435 118,940

Fee and commission income 13 48,124 41,046 Fee and commission expense (3,501) (2,903)

───────── ───────── Net fee and comission income 44,623 38,143

Net gain from foreign currencies 18,664 17,554 Net investment income 14 11,266 2,017 Dividend income 2,937 2,211 Other income 10,634 11,251

───────── ───────── Operating income 253,559 190,116 Staff expenses (53,598) (32,379) Other expenses (59,238) (38,803)

───────── ───────── Operating profit before provision 140,723 118,934 Provision for impairment of loans and advances 5 (89,913) (36,093) Impairment of investment securities (2,963) (4,021)

───────── ───────── Profit before taxation and board of directors' renumeration 47,847 78,820

Taxation 15 (15,692) (15,984) Board of directors' remuneration (90) (90)

───────── ───────── Profit for the year 32,065 62,746

═════════ ═════════ Attributable to: Equity holders of the Bank 20,102 55,600 Non controlling interests 11,963 7,146

───────── ───────── 32,065 62,746 ═════════ ═════════ Fils Fils

Basic and diluted earnings per share - attributable to the equity holders of the Bank 16

13.0

36.0

═════════ ═════════

BURGAN BANK GROUP



───────── ───────── TOTAL ASSETS 7,154,751 5,972,938

═════════ ═════════









53

BURGAN BANK GROUP


Consolidated Statement of Comprehensive Income For the year ended 31 December 2013

2013 2012 KD 000’s KD 000’s Profit for the year 32,065 62,746

───────── ───────── Other comprehensive income Other comprehensive income to be reclassified to profit or loss in subsequent periods:

Financial assets available for sale: Net change in fair value (1,582) 3,308 Net transfer to consolidated income statement (1,773) 2,975 Foreign currency translation adjustment (15,117) 1,067

───────── ───────── Other comprehensive (loss) income for the year (18,472) 7,350

───────── ───────── Total comprehensive income for the year 13,593 70,096

═════════ ═════════ Attributable to: Equity holders of the Bank 439 61,004 Non controlling interests 13,154 9,092

───────── ───────── 13,593 70,096 ═════════ ═════════

BURGAN BANK GROUP



───────── ───────── TOTAL ASSETS 7,154,751 5,972,938

═════════ ═════════









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Reta

ined

ea

rnin

gs

KD

000

’s

Tota

l K

D 0

00’s

Non

co

ntro

lling

in

tere

sts

KD

000

’s

Tota

l equ

ity

KD

000

’s

B

alan

ce a

t 1 Ja

nuar

y 20

13

(Res

tate

d)

154

,497

1

29,5

59

(36,

688)

5

1,41

4

51,

792

3

6,55

4

11,

091

5

64

(1,7

53)

554

9

3,14

1

490

,725

1

29,1

06

619

,831

Pr

ofit

for t

he y

ear

-

-

-

-

-

-

-

-

-

-

20,

102

2

0,10

2

11,

963

3

2,06

5

Oth

er c

ompr

ehen

sive

(los

s)

inc

ome

-

-

-

-

-

-

(4,0

44)

-

(15,

619)

-

-

(1

9,66

3)

1,1

91

(18,

472)

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

Tota

l com

preh

ensi

ve in

com

e -

-

-

-

-

-

(4

,044

) -

(1

5,61

9)

-

20,

102

4

39

13,

154

1

3,59

3

Tran

sfer

to re

serv

es

-

-

-

2,0

66

2,0

66

-

-

-

-

-

(4,1

32)

-

-

-

Shar

e ca

pita

l inc

reas

e in

a

sub

sidia

ry

-

6

,092

6

,092

B

onus

shar

es is

sued

(not

e 12

) 7

,725

-

-

-

-

-

-

-

-

-

(7

,725

) -

-

-

C

ash

divi

dend

(not

e 12

) -

-

-

-

-

-

-

-

-

-

(1

4,71

1)

(14,

711)

-

(1

4,71

1)

Cas

h di

vide

nd p

aid

to n

on

con

trolli

ng in

tere

sts

-

-

-

-

-

-

-

-

-

-

-

-

(3,9

83)

(3,9

83)

Purc

hase

of t

reas

ury

shar

es

-

-

(995

) -

-

-

-

-

-

-

-

(9

95)

-

(995

)

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

Bal

ance

at 3

1 D

ecem

ber 2

013

162

,222

1

29,5

59

(37,

683)

5

3,48

0

53,

858

3

6,55

4

7,0

47

564

(1

7,37

2)

554

8

6,67

5

475

,458

1

44,3

69

619

,827

═══════

═══════

═══════

═══════

═══════

═══════

═══════

═══════

═══════

═══════

═══════

═══════

═══════

═══════

BU

RG

AN

BA

NK

GR

OU

P

The

atta

ched

not

es 1

to 2

4 fo

rm a

n in

tegr

al p

art o

f the

se c

onso

lidat

ed fi

nanc

ial s

tate

men

ts.

6

Con

solid

ated

Sta

tem

ent o

f Cha

nges

in S

hare

hold

ers’

Equ

ity

For

the

year

end

ed 3

1 D

ecem

ber

2013

At

trib

utab

le to

equ

ity h

olde

rs o

f the

Ban

k

Shar

e ca

pita

l K

D 0

00’s

Shar

e pr

emiu

m

KD

000

’s

Trea

sury

sh

ares

K

D 0

00’s

Stat

utor

y re

serv

e K

D 0

00’s

Volu

ntar

y re

serv

e K

D 0

00’s

Trea

sury

sh

ares

re

serv

e K

D 0

00’s

Inve

stm

ent

reva

luat

ion

rese

rve

KD

000

’s

Shar

e ba

sed

com

pens

atio

n re

serv

e K

D 0

00’s

Fore

ign

curr

ency

tr

ansl

atio

n re

serv

e K

D 0

00’s

Oth

er

rese

rves

K

D 0

00’s

Reta

ined

ea

rnin

gs

KD

000

’s

Tota

l K

D 0

00’s

Non

co

ntro

lling

in

tere

sts

KD

000

’s

Tota

l equ

ity

KD

000

’s

B

alan

ce a

t 1 Ja

nuar

y 20

13

(Res

tate

d)

154

,497

1

29,5

59

(36,

688)

5

1,41

4

51,

792

3

6,55

4

11,

091

5

64

(1,7

53)

554

9

3,14

1

490

,725

1

29,1

06

619

,831

Pr

ofit

for t

he y

ear

-

-

-

-

-

-

-

-

-

-

20,

102

2

0,10

2

11,

963

3

2,06

5

Oth

er c

ompr

ehen

sive

(los

s)

inc

ome

-

-

-

-

-

-

(4,0

44)

-

(15,

619)

-

-

(1

9,66

3)

1,1

91

(18,

472)

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

Tota

l com

preh

ensi

ve in

com

e -

-

-

-

-

-

(4

,044

) -

(1

5,61

9)

-

20,

102

4

39

13,

154

1

3,59

3

Tran

sfer

to re

serv

es

-

-

-

2,0

66

2,0

66

-

-

-

-

-

(4,1

32)

-

-

-

Shar

e ca

pita

l inc

reas

e in

a

sub

sidia

ry

-

6

,092

6

,092

B

onus

shar

es is

sued

(not

e 12

) 7

,725

-

-

-

-

-

-

-

-

-

(7

,725

) -

-

-

C

ash

divi

dend

(not

e 12

) -

-

-

-

-

-

-

-

-

-

(1

4,71

1)

(14,

711)

-

(1

4,71

1)

Cas

h di

vide

nd p

aid

to n

on

con

trolli

ng in

tere

sts

-

-

-

-

-

-

-

-

-

-

-

-

(3,9

83)

(3,9

83)

Purc

hase

of t

reas

ury

shar

es

-

-

(995

) -

-

-

-

-

-

-

-

(9

95)

-

(995

)

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

Bal

ance

at 3

1 D

ecem

ber 2

013

162

,222

1

29,5

59

(37,

683)

5

3,48

0

53,

858

3

6,55

4

7,0

47

564

(1

7,37

2)

554

8

6,67

5

475

,458

1

44,3

69

619

,827

═══════

═══════

═══════

═══════

═══════

═══════

═══════

═══════

═══════

═══════

═══════

═══════

═══════

═══════

54

BU

RG

AN

BA

NK

GR

OU

P

The

atta

ched

not

es 1

to 2

4 fo

rm a

n in

tegr

al p

art o

f the

se c

onso

lidat

ed fi

nanc

ial s

tate

men

ts.

7

Con

solid

ated

Sta

tem

ent o

f Cha

nges

in S

hare

hold

ers’

Equ

ity (C

ontin

ued)

Fo

r th

e ye

ar e

nded

31

Dec

embe

r 20

13

Attr

ibut

able

to e

quity

hol

ders

of t

he B

ank

Shar

e ca

pita

l K

D 0

00’s

Shar

e pr

emiu

m

KD

000

’s

Trea

sury

sh

ares

K

D 0

00’s

Stat

utor

y re

serv

e K

D 0

00’s

Volu

ntar

y re

serv

e K

D 0

00’s

Trea

sury

sh

ares

re

serv

e K

D 0

00’s

Inve

stm

ent

reva

luat

ion

rese

rve

KD

000

’s

Shar

e ba

sed

com

pens

atio

n re

serv

e K

D 0

00’s

Fore

ign

curr

ency

tr

ansl

atio

n re

serv

e K

D 0

00’s

Oth

er

rese

rves

K

D 0

00’s

Reta

ined

ea

rnin

gs

KD

000

’s

Tota

l K

D 0

00’s

Non

co

ntro

lling

in

tere

sts

KD

000

’s

Tota

l equ

ity

KD

000

’s

B

alan

ce a

t 1 Ja

nuar

y 20

12

147,

140

129,

559

(33,

139)

45

,625

46

,003

36

,552

5,

846

561

(1,9

12)

554

70,4

99

447,

288

118,

421

565,

709

Prof

it fo

r the

yea

r -

-

-

-

-

-

-

-

-

-

55

,600

55

,600

7,

146

62,7

46

Oth

er c

ompr

ehen

sive

inco

me

-

-

-

-

-

-

5,24

5 -

15

9 -

-

5,

404

1,94

6 7,

350

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

Tota

l com

preh

ensi

ve in

com

e -

-

-

-

-

-

5,

245

-

159

-

55,6

00

61,0

04

9,09

2 70

,096

Tr

ansf

er to

rese

rves

-

-

-

5,

789

5,78

9 -

-

-

-

-

(1

1,57

8)

-

-

-

Shar

e ca

pita

l inc

reas

e in

a

sub

sidia

ry

-

-

-

-

-

-

-

-

-

-

-

-

4,92

0 4,

920

Bon

us sh

ares

issu

ed (n

ote

12)

7,35

7 -

-

-

-

-

-

-

-

-

(7

,357

) -

-

-

C

ash

divi

dend

(not

e 12

) -

-

-

-

-

-

-

-

-

-

(1

4,02

3)

(14,

023)

-

(1

4,02

3)

Cas

h di

vide

nd p

aid

to n

on

con

trolli

ng in

tere

sts

-

-

-

-

-

-

-

-

-

-

-

-

(4,1

30)

(4,1

30)

Purc

hase

of t

reas

ury

shar

es

-

-

(3,5

53)

-

-

-

-

-

-

-

-

(3,5

53)

-

(3,5

53)

Sale

of t

reas

ury

shar

es

-

-

4 -

-

2

-

-

-

-

-

6 -

6

Acq

uist

ion

of su

bsid

iary

-

-

-

-

-

-

-

-

-

-

-

-

80

3 80

3 Sh

are

base

d co

mpe

nsat

ion

e

xpen

se

-

-

-

-

-

-

-

3 -

-

-

3

-

3

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

Bal

ance

at 3

1 D

ecem

ber

201

2 15

4,49

7 12

9,55

9 (3

6,68

8)

51,4

14

51,7

92

36,5

54

11,0

91

564

(1,7

53)

554

93,1

41

490,

725

129,

106

619,

831

═══════

═══════

═══════

═══════

═══════

═══════

═══════

═══════

═══════

═══════

═══════

═══════

═══════

═══════

BU

RG

AN

BA

NK

GR

OU

P

The

atta

ched

not

es 1

to 2

4 fo

rm a

n in

tegr

al p

art o

f the

se c

onso

lidat

ed fi

nanc

ial s

tate

men

ts.

7

Con

solid

ated

Sta

tem

ent o

f Cha

nges

in S

hare

hold

ers’

Equ

ity (C

ontin

ued)

Fo

r th

e ye

ar e

nded

31

Dec

embe

r 20

13

Attr

ibut

able

to e

quity

hol

ders

of t

he B

ank

Shar

e ca

pita

l K

D 0

00’s

Shar

e pr

emiu

m

KD

000

’s

Trea

sury

sh

ares

K

D 0

00’s

Stat

utor

y re

serv

e K

D 0

00’s

Volu

ntar

y re

serv

e K

D 0

00’s

Trea

sury

sh

ares

re

serv

e K

D 0

00’s

Inve

stm

ent

reva

luat

ion

rese

rve

KD

000

’s

Shar

e ba

sed

com

pens

atio

n re

serv

e K

D 0

00’s

Fore

ign

curr

ency

tr

ansl

atio

n re

serv

e K

D 0

00’s

Oth

er

rese

rves

K

D 0

00’s

Reta

ined

ea

rnin

gs

KD

000

’s

Tota

l K

D 0

00’s

Non

co

ntro

lling

in

tere

sts

KD

000

’s

Tota

l equ

ity

KD

000

’s

B

alan

ce a

t 1 Ja

nuar

y 20

12

147,

140

129,

559

(33,

139)

45

,625

46

,003

36

,552

5,

846

561

(1,9

12)

554

70,4

99

447,

288

118,

421

565,

709

Prof

it fo

r the

yea

r -

-

-

-

-

-

-

-

-

-

55

,600

55

,600

7,

146

62,7

46

Oth

er c

ompr

ehen

sive

inco

me

-

-

-

-

-

-

5,24

5 -

15

9 -

-

5,

404

1,94

6 7,

350

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

Tota

l com

preh

ensi

ve in

com

e -

-

-

-

-

-

5,

245

-

159

-

55,6

00

61,0

04

9,09

2 70

,096

Tr

ansf

er to

rese

rves

-

-

-

5,

789

5,78

9 -

-

-

-

-

(1

1,57

8)

-

-

-

Shar

e ca

pita

l inc

reas

e in

a

sub

sidia

ry

-

-

-

-

-

-

-

-

-

-

-

-

4,92

0 4,

920

Bon

us sh

ares

issu

ed (n

ote

12)

7,35

7 -

-

-

-

-

-

-

-

-

(7

,357

) -

-

-

C

ash

divi

dend

(not

e 12

) -

-

-

-

-

-

-

-

-

-

(1

4,02

3)

(14,

023)

-

(1

4,02

3)

Cas

h di

vide

nd p

aid

to n

on

con

trolli

ng in

tere

sts

-

-

-

-

-

-

-

-

-

-

-

-

(4,1

30)

(4,1

30)

Purc

hase

of t

reas

ury

shar

es

-

-

(3,5

53)

-

-

-

-

-

-

-

-

(3,5

53)

-

(3,5

53)

Sale

of t

reas

ury

shar

es

-

-

4 -

-

2

-

-

-

-

-

6 -

6

Acq

uist

ion

of su

bsid

iary

-

-

-

-

-

-

-

-

-

-

-

-

80

3 80

3 Sh

are

base

d co

mpe

nsat

ion

e

xpen

se

-

-

-

-

-

-

-

3 -

-

-

3

-

3

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

Bal

ance

at 3

1 D

ecem

ber

201

2 15

4,49

7 12

9,55

9 (3

6,68

8)

51,4

14

51,7

92

36,5

54

11,0

91

564

(1,7

53)

554

93,1

41

490,

725

129,

106

619,

831

═══════

═══════

═══════

═══════

═══════

═══════

═══════

═══════

═══════

═══════

═══════

═══════

═══════

═══════

55

BURGAN BANK GROUP


Consolidated Statement of Cash Flows Year ended 31 December 2013

2013 2012 Notes KD 000’s KD 000’s Operating activities Profit before taxation and board of directors' remuneration 47,847 78,820 Adjustments: Net investment income 14 (11,266) (2,017) Impairment of loans and advances 89,913 36,093 Impairment of investment securities 2,963 4,021 Dividend income (2,937) (2,211) Depreciation and amortisation 13,857 10,952 Share based compensation expense - 3

───────── ───────── Operating profit before changes in operating assets and liabilities 140,377 125,661 Changes in operating assets and liabilities: Treasury bills and bonds with CBK and others (100,059) (64,509) Due from banks and other financial institutions (112,204) 236,060 Loans and advances to customers (647,024) (655,294) Other assets (81,008) (29,633) Due to banks 256,927 (11,447) Other borrowed funds - 26 Due to other financial institutions 167,239 62,368 Deposits from customers 744,968 592,865 Other liabilities 17,684 9,490 Taxation paid (17,395) (11,934)

───────── ───────── Net cash from operating activities 369,505 253,653

───────── ───────── Investing activities Purchase of investment securities (1,103,693) (182,830) Proceeds from sale of investment securities 998,260 91,122 Purchase of property and equipment (19,175) (16,948) Dividends received 2,937 2,211 Acquisition of subsidiary, net of cash acquired 8 - (10,181)

───────── ───────── Net cash used in investing activities (121,671) (116,626)

───────── ───────── Financing activities Proceeds from issuance of other borrowed funds - 100,000 Repayment of other borrowed funds (3,388) - Proceeds from share capital increase 6,092 4,920 Purchase of treasury shares (995) (3,553) Sale of treasury shares - 6 Cash dividend paid to equity holders of the Bank 12 (14,711) (14,023) Cash dividend paid to non controlling interests (3,983) (4,130)

───────── ───────── Net cash from financing activities (16,985) 83,220

───────── ───────── Net increase in cash and cash equivalents 230,849 220,247 Effect of foreign currency translation (14,027) (131) Cash and cash equivalents at 1 January 787,468 567,352

───────── ───────── Cash and cash equivalents at 31 December 3 1,004,290 787,468

═════════ ═════════ Additional cash flow information: Interest received 258,415 169,561 Interest paid 93,277 58,486

═════════ ═════════

BURGAN BANK GROUP



───────── ───────── TOTAL ASSETS 7,154,751 5,972,938

═════════ ═════════









56

BURGAN BANK GROUP

Notes to the Consolidated Financial Statements At 31 December 2013

9

1. INCORPORATION AND PRINCIPAL ACTIVITIES Burgan Bank S.A.K.P. ("the Bank”) is a public shareholding company incorporated in the State of Kuwait by Amiri Decree dated 27 December 1975 listed on the Kuwait Stock Exchange and is registered as a Bank with the Central Bank of Kuwait (“CBK”). The Bank’s registered address is P.O. Box 5389, Safat 12170, State of Kuwait. The consolidated financial statements of the Bank and its subsidiaries (collectively “the Group”) for the year ended 31 December 2013 were authorised for issue in accordance with a resolution of the Board of Directors on 23 January 2014 and are issued subject to the approval of the Ordinary General Assembly of the shareholders’ of the Bank. The Ordinary General Assembly of the Shareholders has the power to amend these consolidated financial statements after issuance. The principal activities of the Group are explained in note 17. The Bank is a subsidiary of Kuwait Projects Company Holding K.S.C. ("the Parent Company”). The New Companies Law issued on 26 November 2012 by Decree Law no. 25 of 2012 (the “Companies Law”), cancelled the Commercial Companies Law No. 15 of 1960. The Companies Law was subsequently amended on 27 March 2013 by Decree Law no. 97 of 2013 (the Decree). The Executive Regulations of the new amended law was issued on 29 September 2013 and was published in the official Gazette on 6 October 2013. As per article three of the executive regulations, the companies have one year from the date of publishing the executive regulations to comply with the new amended law. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of preparation The consolidated financial statements are prepared under the historical cost convention, except for financial assets classified as fair value through profit or loss, certain financial assets classified as available for sale and derivative financial instruments that are measured at fair value. The consolidated financial statements are presented in Kuwaiti Dinars (KD), which is the Bank's functional currency rounded to the nearest thousand except when otherwise stated. Statement of compliance The consolidated financial statements of the Group have been prepared in accordance with the regulations of the State of Kuwait for financial services institutions regulated by the CBK. These regulations require adoption of all International Financial Reporting Standards (“IFRS”) as issued by International Accounting Standards Board (“IASB”) except for International Accounting Standards (“IAS”) 39: Financial Instruments: Recognition and Measurement requirement for collective provision, which has been replaced by the CBK’s requirement for a minimum general provision as described under the accounting policies for impairment of financial assets. Changes in accounting policies and disclosures The accounting policies used in the preparation of these consolidated financial statements are consistent with those used in the previous financial year, except for the adoption of the following new standards and interpretations effective as of 1 January 2013 and the accounting policy on ‘investment in associate’ during the year. IFRS 7: Disclosures — Offsetting Financial Assets and Financial Liabilities (Amendment) (effective for annual periods beginning on or after 1 January 2013) These amendments require an entity to disclose information about rights to set-off and related arrangements (e.g., collateral agreements). The disclosures would provide users with information that is useful in evaluating the effect of netting arrangements on an entity’s financial position. The new disclosures are required for all recognised financial instruments that are set off in accordance with IAS 32 Financial Instruments: Presentation. The disclosures also apply to recognised financial instruments that are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are set off in accordance with IAS 32. The adoption of this standard does not have any material impact on the consolidated financial statements of the Group.

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BURGAN BANK GROUP


10

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Changes in accounting policies and disclosures (continued) IFRS 10: Consolidated Financial Statements (effective for annual periods beginning on or after 1 January 2013) IFRS 10 replaces the consolidation guidance in IAS 27 Consolidated and Separate Financial Statements’ and SIC-12 Consolidation - Special Purpose Entities by introducing a single consolidation model for all entities based on control, irrespective of the nature of the investee (i.e., whether an entity is controlled through voting rights of investors or through other contractual arrangements as is common in special purpose entities). Under IFRS 10, control is based on whether an investor has 1) power over the investee; 2) exposure or rights, to variable returns from its involvement with the investee and 3) the ability to use its power over the investee to affect the amount of the returns. The adoption of this standard has not resulted in any impact on the financial position or performance of the Group.

IFRS 11: Joint Arrangements (effective for annual periods beginning on or after 1 January 2013) IFRS 11 replaces IAS 31 Interests in Joint Ventures and SIC-13 Jointly-controlled Entities — Non-monetary Contributions by Venturers. IFRS 11 removes the option to account for jointly controlled entities (JCEs) using proportionate consolidation. Instead, JCEs that meet the definition of a joint venture under IFRS 11 must be accounted for using the equity method. The adoption of this standard has not resulted in any impact on the financial position or performance of the Group.

IFRS 12: Disclosure of Involvement with Other Entities (effective for annual periods beginning on or after 1 January 2013) IFRS 12 sets out the requirements for disclosures relating to an entity’s interests in subsidiaries, joint arrangements, associates and structured entities. The requirements in IFRS 12 are more comprehensive than the previously existing disclosure requirements for subsidiaries, for example, where a subsidiary is controlled with less than a majority of voting rights. While the Group has subsidiaries with material non controlling interests, there are no unconsolidated structured entities.

IFRS 13: Fair Value Measurement (effective for annual periods beginning on or after 1 January 2013) IFRS 13 establishes a single source of guidance under IFRS for all fair value measurements. IFRS 13 does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under IFRS. IFRS 13 defines fair value as an exit price. As a result of the guidance in IFRS 13, the Group re-assessed its policies for measuring fair values. IFRS 13 also requires additional disclosures.

Application of IFRS 13 has not materially impacted the fair value measurements of the Group. Additional disclosures where required, are provided in the individual notes relating to the assets and liabilities whose fair values were determined. Fair value hierarchy is provided in note 21.

IAS 1: Financial Statement Presentation – Presentation of Items of Other Comprehensive Income (Amendment) (effective for annual periods beginning on or after 1 July 2012) The amendments to IAS 1 introduce a grouping of items presented in other comprehensive income. Items that will be reclassified ( ‘recycled’) to profit or loss at a future point in time have to be presented separately from items that will not be reclassified. The adoption of this standard has no effect on the financial position or performance of the Group and only resulted in presentation changes in consolidated statement of comprehensive income.

IAS 1 Clarification of the requirement for comparative information (Amendment) (effective for annual periods beginning on or after 1 July 2012) The amendment to IAS 1 clarifies the difference between voluntary additional comparative information and the minimum required comparative information. An entity must include comparative information in the related notes to the financial statements when it voluntarily provides comparative information beyond the minimum required comparative period. As a result, the Group has not included any additional voluntarily comparative information in its consoldated financial statements. The amendments have no impact on the Group’s financial position or performance.

IAS 19: Employee Benefits (Amendment) (effective for annual periods beginning on or after 1 January 2013) IAS 19 includes a number of amendments to the accounting for defined benefit plans, including actuarial gains and losses that are now recognised in other comprehensive income (OCI) and permanently excluded from profit and loss; expected returns on plan assets that are no longer recognised in profit or loss, instead, there is a requirement to recognise interest on the net defined benefit liability (asset) in profit or loss, calculated using the discount rate used to measure the defined benefit obligation, and; unvested past service costs are now recognised in profit or loss at the earlier of when the amendment occurs or when the related restructuring or termination costs are recognised. Other amendments include new disclosures, such as, quantitative sensitivity disclosures.The adoption of this standard has no material effect on the financial position or performance of the Group.

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BURGAN BANK GROUP


11

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Changes in accounting policies and disclosures (continued) IAS 27: Separate Financial Statements (as revised in 2011) As a consequence of the new IFRS 10 and IFRS 12, what remains of IAS 27 is limited to accounting for subsidiaries, jointly controlled entities, and associates in separate financial statements. The Group does not present separate financial statements. IAS 32: Tax effects of distributions to holders of equity instruments (Amendment) (effective for annual periods beginning on or after 1 July 2012) The amendment to IAS 32 Financial Instruments: Presentation clarifies that income taxes arising from distributions to equity holders are accounted for in accordance with IAS 12 Income Taxes. The amendment removes existing income tax requirements from IAS 32 and requires entities to apply the requirements in IAS 12 to any income tax arising from distributions to equity holders. The amendment did not have an impact on the consolidated financial statements for the Group, as there is no tax consequences attached to cash or non-cash distribution. Other amendments to IFRSs which are effective for annual accounting period starting from 1 January 2013 did not have any material impact on the accounting policies, financial position or performance of the Group. New and revised IASB Standards, but not yet effective Standards issued but not yet effective up to the date of issuance of the Group’s consolidated financial statements are listed below. The Group intends to adopt those standards when they become effective. IFRS 9: Financial Instruments: Classification and Measurement IFRS 9, as issued, reflects the first phase of the IASB’s work on the replacement of IAS 39 and applies to classification and measurement of financial assets and financial liabilities as defined in IAS 39. In subsequent phases, the IASB is addressing hedge accounting and impairment of financial assets. The adoption of the first phase of IFRS 9 will have an effect on the classification and measurement of the Group’s financial assets. The Group will quantify the effect in conjunction with the other phases, when the final standard including all phases is issued. The standard was initially effective for annual periods beginning on or after 1 January 2013, but amendments to IFRS 9 mandatory effective date of IFRS 9 and transition disclosures, issued in December 2011, moved the mandatory effective date to 1 January 2015. On November 19, 2013, the International Accounting Standards Board (IASB) issued amendments to IFRS 9 that introduced a new general hedge accounting and removed the 1 January 2015, mandatory effective date from IFRS 9. The new hedge accounting model significantly differs from the IAS 39 hedge accounting model in a number of aspects including eligibility of hedging instruments and hedged items, accounting for the time value component of options and forward contracts, qualifying criteria for applying hedge accounting, modification and discontinuation of hedging relationships etc. Under the amendments, entities that adopt IFRS 9 (as amended in November 2013) can choose an accounting policy of either adopting the new IFRS 9 hedge accounting model now or continuing to apply the hedge accounting model in IAS 39 for the time being. Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27) These amendments are effective for annual periods beginning on or after 1 January 2014 provide an exception to the consolidation requirement for entities that meet the definition of an investment entity under IFRS 10. The exception to consolidation requires investment entities to account for subsidiaries at fair value through profit or loss. It is not expected that this amendment would be relevant to the Group, since none of the entities in the Group would qualify to be an investment entity under IFRS 10. IAS 32: Financial Instruments: Presentation - Offsetting Financial Assets and Financial liabilities (Amendment) The amendments clarify the meaning of “currently has a legally enforceable right to set-off” and also clarify the application of the IAS 32 offsetting criteria to settlement systems (such as central clearing house systems) which apply gross settlement mechanisms that are not simultaneous. The Group is currently assessing the impact that this standard will have on the consolidated financial position and performance when become effective for annual periods beginning on or after 1 January 2014.

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BURGAN BANK GROUP


12

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) New and revised IASB Standards, but not yet effective (continued) IAS 36: Impairment of Assets - Recoverable Amount Disclosures for Non-Financial Assets (Amendment) These amendments remove the unintended consequences of IFRS 13 on the disclosures required under IAS 36. In addition, these amendments require disclosure of the recoverable amounts for the assets or CGUs for which impairment loss has been recognised or reversed during the period. These amendments are effective retrospectively for annual periods beginning on or after 1 January 2014 with earlier application permitted, provided IFRS 13 is also applied. IAS 39 Novation of Derivatives and Continuation of Hedge Accounting (Amendment) These amendments provide relief from discontinuing hedge accounting when novation of a derivative designated as a hedging instrument meets certain criteria. These amendments are effective for annual periods beginning on or after 1 January 2014. Basis of consolidation The consolidated financial statements comprise the financial statements of the Bank and its subsidiaries (investees which are controlled by the Bank). Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically, the Group controls an investee if and only if the Group has: Power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the

investee) Exposure, or rights, to variable returns from its involvement with the investee, and The ability to use its power over the investee to affect its returns When the Group has less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including: The contractual arrangement with the other vote holders of the investee Rights arising from other contractual arrangements The Group’s voting rights and potential voting rights The Group re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the statement of comprehensive income from the date the Group gains control until the date the Group ceases to control the subsidiary. Profit or loss and each component of OCI are attributed to the equity holders of the parent of the Group and to the non-controlling interests, even if this results in the non-controlling interests having a deficit balance. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Group’s accounting policies. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation. A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the Group loses control over a subsidiary, it: Derecognises the assets (including goodwill) and liabilities of the subsidiary Derecognises the carrying amount of any non-controlling interests Derecognises the cumulative translation differences recorded in equity Recognises the fair value of the consideration received Recognises the fair value of any investment retained Recognises any surplus or deficit in profit or loss Reclassifies the parent’s share of components previously recognised in OCI to profit or loss or retained

earnings, as appropriate, as would be required if the Group had directly disposed of the related assets or liabilities

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BURGAN BANK GROUP


13

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Basis of consolidation (continued) The subsidiaries of the Group are as follows:

Name of company

Principal activities

Country of incorporation

Effective interest as at 31 December

2013

Effective interest as at 31 December

2012 Jordan Kuwait Bank P.S.C. (“JKB”) Banking Jordan 51.19% 51.19% Algeria Gulf Bank S.P.A. (“AGB”) Banking Algeria 91.13% 91.13% Bank of Baghdad P.J.S.C. (“BoB”) Banking Iraq 51.79% 51.79% Tunis International Bank S.A (“TIB”) Banking Tunisia 86.70% 86.70% Burgan Bank A.S. (“BBT”) [formerly Eurobank Tekfen A.S.]

Banking Turkey 99.26% 99.26%

Held through JKB United Financial Investments Company Brokerage Jordan 25.70% 25.70% Ejara Leasing Company Leasing Jordan 51.19% 51.19%

Held through BoB Baghdad Brokerage Company Banking Iraq 51.79% 51.79% Held through BBT Burgan Finansal Kiralama A.S. [formerly EFG Finansal Kiralama A.S.]

Leasing Turkey 99.26% 99.25%

Burgan Yatirim Menkul Degerler A.S. [formerly EFG İstanbul Equities Menkul Degerler A.S]

Brokerage Turkey 99.26% 99.25% Burgan Portfoy Yonetimi A.S. [formerly EFG İstanbul Portfoy Yonetimi A.S.]

Asset Management Turkey 99.26% 99.25%

Financial instruments Classification of financial instruments The Group classifies financial instruments as at "fair value through profit or loss", "loans and receivables", "available for sale", "held to maturity" and “financial liabilities at amortised cost”. Management determines the appropriate classification of each instrument at initial recognition. Recognition/de-recognition A financial asset or a financial liability is recognised when the Group becomes a party to the contractual provisions of the instrument. All regular way purchase and sale of financial assets are recognised using settlement date accounting. Changes in fair value between the trade date and settlement date are recognised in the consolidated income statement or in OCI in accordance with the policy applicable to the related instrument. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulations or conventions in the market place. A financial asset (in whole or in part) is derecognised either when: the contractual rights to receive cash flows from the asset have expired; or the Group has transferred its rights to receive cash flows from the assets or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass through’ arrangement; and either (a) the Group has transferred substantially all the risks and rewards of the asset, or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. Where the Group has transferred its right to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Group’s continuing involvement in the asset. A financial liability is derecognised when the obligation specified in the contract is discharged, cancelled or expired. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in the consolidated income statement.

61

BURGAN BANK GROUP


14

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Financial instruments (continued) Measurement All financial assets or financial liabilities are initially measured at fair value. Transaction costs are added only for those financial instruments not measured at fair value through profit or loss. Transaction costs on financial assets at fair value through profit or loss are recognised in the consolidated income statement. Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss includes financial assets held for trading and financial assets designated upon initial recognition as at fair value through profit or loss. Financial assets are classified as held for trading if they are acquired for the purpose of selling or buying in the near term. Changes in fair value are recognised in net investment income. Interest earned is accrued in interest income, using the effective interest rate (EIR), while dividend income is recorded under operating income, in the consolidated income statement, when the right to the payment has been established. Financial assets are designated as at fair value through profit or loss, if they are managed and their performance is evaluated on reliable fair value basis in accordance with documented investment strategy. After initial recognition financial assets at fair value through profit or loss are remeasured at fair value with all changes in fair value recognised in the consolidated income statement. Derivative instruments are categorised as held for trading unless they are designated as hedging instruments. Financial assets held to maturity Non-derivative financial assets with fixed or determinable payments and fixed maturities are classified as held to maturity when the Group has the positive intention and ability to hold to maturity. After initial recognition, held to maturity financial assets are carried at amortised cost using the EIR method, less impairment losses, if any. The calculation takes into account any premium or discount on acquisition and includes transaction costs and fees that are an integral part of the effective interest rate. Loans and receivables These are non-derivative financial assets having fixed or determinable payments that are not quoted in an active market. These are subsequently measured at amortised cost using the effective yield method adjusted for impairment losses, if any. Treasury bills and bonds with CBK and others, due from banks and OFIs, and loans and advances to customers are classified as “loans and receivables”. Financial assets available for sale Financial assets available for sale include equity and debt securities. Equity investments classified as available for sale are those, which are neither classified as loans and receivables nor at fair value through profit or loss. Debt securities in this category are those which are intended to be held for an indefinite period of time that may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices. These are subsequently measured at fair value with gains and losses being recognised as other comprehensive income in the equity as "investment revaluation reserve" until the financial assets are derecognised or until the financial assets are determined to be impaired at which time the cumulative gains and losses previously reported as OCI in equity are transferred to the consolidated income statement. Financial assets whose fair value cannot be reliably measured are carried at cost less impairment losses, if any. Financial liabilities at amortised cost These financial liabilities are subsequently measured at amortised cost using the EIR. “Due to banks”, “due to other financial institutions (“OFI”)”, “deposit from customers”, “other borrowed funds”, and “other liabilities” are classified as “financial liabilities at amortised cost”.

62

BURGAN BANK GROUP


15

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Financial instruments (continued) Measurement (continued) Other borrowed funds Financial instruments issued by the Bank that are not designated at fair value through profit or loss, are classified under ‘other borrowed funds’, where the substance of the contractual arrangement results in the Bank having an obligation either to deliver cash or another financial asset to the holder, or to satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of own equity shares. Financial guarantees In the ordinary course of business, the Group gives financial guarantees, consisting of letters of credit, guarantees and acceptances. Financial guarantees are initially recognised in the financial statements at fair value, being the premium received. The premium received is amortised in the consolidated income statement in 'fee and commission income' on a straight line basis over the life of the guarantee. The guarantee liability is subsequently measured as a higher of the amount initially recognised less amortisation or the value of any financial obligation that may arise as a result of financial guarantee. Any increase in the liability relating to financial guarantees is recorded in the consolidated income statement. Derivative financial instruments The Group makes use of derivative instruments to manage exposures to interest rate, foreign currency and credit risks. Where derivative contracts are entered into by specifically designating such contracts as a fair value hedge or a cash flow hedge of a recognised asset or liability, the Group accounts for them using hedge accounting principles, provided certain criteria are met. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative. For derivative contracts that do not qualify for hedge accounting, any gains or losses arising from changes in fair value of the derivative contract are taken directly to the consolidated income statement. Hedge accounting For the purposes of hedge accounting, hedges are classified into two categories: (a) fair value hedges when hedging the exposure to changes in the fair value of a recognised asset or liability or an unrecognised firm commitment; and (b) cash flow hedges, when hedging exposure to variability in cash flows that is either attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction or a foreign currency risk in an unrecognised firm commitment. When a financial instrument is designated as a hedge, the Group formally documents the relationship between the hedging instrument and hedged item as well as its risk management objectives and its strategy for undertaking the various hedging transactions. The Group also document its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows attributable to the hedge risk. The Group discontinues hedge accounting when the following criteria are met:

a) it is determined that the hedging instrument is not, or has ceased to be, highly effective as a hedge; b) the hedging instrument expires, or is sold, terminated, or exercised; c) the hedged item matures or is sold or repaid; or d) a forecast transaction is no longer deemed highly probable.

63

BURGAN BANK GROUP


16

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Derivative financial instruments (continued) Fair value hedges The changes in fair value of the hedging instrument that qualify and is designated as fair value hedge is recorded in the consolidated income statement, together with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. If the hedge accounting is discontinued, the fair value adjustment to the hedged item is amortised to the consolidated income statement over the period to maturity of the previously designated hedge relationship using the EIR. If the hedged item is derecognised, the unamortised fair value is recognised immediately in the consolidated income statement. When an unrecognised firm commitment is designated as a hedged item, the subsequent cumulative change in the fair value of the firm commitment attributable to the hedged risk is recognised as an asset or liability with a corresponding gain or loss recognised in consolidated income statement. Cash flow hedges For qualifying cash flow hedges, the fair value gain or loss associated with the effective portion of the cash flow hedge is recognised initially in OCI, and transferred to the consolidated income statement in the periods when the hedged transaction affects consolidated income statement. Any ineffective portion of the gain or loss on the hedging instrument is recognised immediately in the consolidated income statement. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in other comprehensive income at that time remains in other comprehensive income and is recognised when the hedged forecast transaction is ulimately recognised in the consolidated income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was recognised in other comprehensive income is immediately transferred to the consolidated income statement. Fair value measurement applicable after 1 January 2013 The Group measures financial instruments, such as, derivatives, investment securities etc., at each balance sheet date. Also, fair values of financial instruments measured at amortised cost are disclosed in note 21. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either:

In the principal market for the asset or liability, or In the absence of a principal market, in the most advantageous market for the asset or liability The principal or the most advantageous market must be accessible to by the Group. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. A fair value measurement of a non-financial asset takes into account a market participant's ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs.

64

BURGAN BANK GROUP


17

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Fair value measurement applicable after 1 January 2013 (continued) All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole: Level 1 — Quoted (unadjusted) market prices in active markets for identical assets or liabilities Level 2 — Valuation techniques for which the lowest level input that is significant to the fair value

measurement is directly or indirectly observable Level 3 — Valuation techniques for which the lowest level input that is significant to the fair value

measurement is unobservable For financial instruments quoted in an active market, fair value is determined by reference to quoted market prices. Bid prices are used for assets and offer prices are used for liabilities. The fair value of investments in mutual funds, unit trusts or similar investment vehicles are based on the last published net assets value. For unquoted financial instruments fair value is determined by reference to the market value of a similar investment, discounted cash flows, other appropriate valuation models or brokers’ quotes. For financial instruments carried at amortised cost, the fair value is estimated by discounting future cash flows at the current market rate of return for similar financial instruments. For investments in equity instruments, where a reasonable estimate of fair value cannot be determined, the investment is carried at cost. For assets and liabilities that are recognised in the financial statements on a recurring basis, the Group determines whether transfers have occurred between Levels in the hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period. For the purpose of fair value disclosures, the Group has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy as explained above. Fair value measurement applicable before 1 January 2013 The fair value of financial instruments traded in active markets is based on their quoted market price (bid price for assets and ask price for liabilities) without any deduction for transaction costs. For financial instruments not traded in active markets, a reasonable estimate of fair value is determined by reference to the current fair value of another instrument that is substantially the same; recent arm’s length market transactions; discounted cash flow analysis; or other valuation techniques commonly used by market participants. Amortised cost This is computed using the effective interest method less any allowance for impairment. The calculation takes into account any premium or discount on acquisition and includes transaction costs and fees that are an integral part of the effective interest rate. Offsetting of financial instruments Financial assets and financial liabilities are offset and the net amount reported in the consolidated statement of financial position, if there is a currently enforceable legal right to offset and intends to settle on a net basis, to realise the asset and settle the liability simultaneously. Assets pending sale The Group occasionally acquires non-monetary assets in settlement of certain financing receivables and loans and advances. Such assets are stated at the lower of the carrying value of the related financing receivables and loans and advances and the current fair value. Gains or losses on disposal, and revaluation losses, are recognised in the consolidated income statement.

65

BURGAN BANK GROUP


18

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Impairment of financial assets The Group assesses at each reporting date whether there is an objective evidence that a specific financial asset or a group of financial assets are impaired. A financial asset or a group of financial assets is deemed to be impaired, if and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. Objective evidence that a specific financial asset or a group of financial assets classified as loans and receivables are impaired includes whether any payment of principal or interest is overdue by more than 90 days or there are any known difficulties in the cash flows including the sustainability of the counterparty’s business plan, credit rating downgrades, breach of original terms of the contract, its ability to improve performance once a financial difficulty has arisen, deterioration in the value of collateral etc. The Group assess whether objective evidence of impairment exists on an individual basis for each individually significant asset and collectively for others not deemed individually significant except for financial assets classified as loans and receivables where minimum general provision as per CBK’s instructions is followed. The impairment loss for financial assets classified as loans and receivables is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows including amounts recoverable from collateral and guarantees, discounted at the financial asset’s original effective interest rate. If the financial asset has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the consolidated income statement. For debt instruments classified as available-for-sale, the Group assesses individually whether there is objective evidence of impairment based on the same criteria as financial assets classified as loans and receivables. 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 consolidated income statement. If, in a subsequent period, the fair value of a debt instrument increases and the increase can be objectively related to a credit event occurring after the impairment loss was recognised in the consolidated income statement, the impairment loss is reversed through the consolidated income statement. In the case of equity instruments classified as ‘available for sale’, a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the assets are impaired. If any evidence of impairment exists, 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 the consolidated income statement, is recognised in the consolidated income statement. Subsequent increases in fair value of such available for sale equity instruments are not reversed through the consolidated income statement. For non equity financial assets, the carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the consolidated income statement. If, in a subsequent period, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognised, the previously recognised impairment loss is increased or reduced by adjusting the allowance account. In addition, in accordance with CBK instructions, a minimum general provision is made on all applicable credit facilities (net of certain categories of collateral) that are not provided for specifically. Financial assets are written off when there is no realistic prospect of recovery.

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BURGAN BANK GROUP


19

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Renegotiated loans In the event of a default, the Group seeks to restructure loans rather than take possession of collateral. This may involve extending the payment arrangements and the agreement of new loan conditions. When the terms and conditions of these loans are renegotiated, the terms and conditions of the new contractual arrangement apply in determining whether these loans remain past due. Management continually reviews renegotiated loans to ensure that all criteria are met and that future payments are likely to occur. Repurchase and reverse repurchase agreements Assets sold with a simultaneous commitment to repurchase at a specified future date at an agreed price (repos) are not derecognised in the consolidated statement of financial position as the Group retains substaintially all the risks and rewards of ownership. The corresponding cash received is recognised in the consolidated statement of financial position as an asset with a corresponding obligation to return it, including the accrued interest as a liability, reflecting the transaction’s economic substance as loan to the Group. The difference between the sale and repurchase price is treated as interest expense using the effective interest rate method. Conversely, assets purchased with a corresponding commitment to resell at a specified future date at an agreed price (reverse repos) are not recognised in the consolidated statement of financial position. Amounts paid under these agreements are treated as interest earning assets and the difference between the purchase and resale price treated as interest income using the effective interest rate method. Cash and cash equivalents Cash and cash equivalents comprises of cash in hand and in current account with banks and OFIs and balances with CBK and due from banks and OFIs with original maturities not exceeding thirty days from acquisition date. Investment in associate The Group’s investment in its associate is accounted for using the equity method. An associate is an entity in which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control or joint control over those policies. Under the equity method, the investment in associate is carried in the consolidated statement of financial position at cost plus post acquisition changes in the Group’s share of net assets of the associate. Goodwill relating to the associate is included in the carrying amount of the investment and is neither amortised nor individually tested for impairment. The consolidated income statement reflects the share of the results of operations of the associate. Where there has been a change recognised directly in the other comprehensive income of the associate, the Group recognises its share of any changes and discloses this, when applicable, in the statement of changes in equity. Unrealised gains and losses resulting from transactions between the Group and the associate are eliminated to the extent of the interest in the associate. The Group’s share of profit of an associate is shown on the face of the consolidated income statement. This is the profit attributable to equity holders of the associate and therefore is profit after tax and non controlling interest in the subsidiaries of the associate. The financial statements of the associate are prepared for the same reporting period as the Group. Where necessary, adjustments are made to bring the accounting policies in line with those of the Group. After application of the equity method, the Group determines whether it is necessary to recognise an additional impairment loss on the Group’s investment in its associate. The Group determines at each reporting date whether there is any objective evidence that the investment in the associate is impaired. If this is the case the Group calculates the amount of impairment as the difference between the recoverable amount of the associate and its carrying value and recognises the amount in the consolidated income statement. Upon loss of significant influence over the associate, the Group measures and recognises any retained investment at its fair value. Any difference between the carrying amount of the associate upon loss of significant influence and the fair value of the retaining investment and proceeds from disposal is recognised in consolidated income statement.

67

BURGAN BANK GROUP


20

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Property and equipment Property and equipment are stated at cost less accumulated depreciation and impairment losses. Depreciation is provided on all premises and equipment, other than freehold land, at rates calculated to write off the cost of each asset on a straight line basis to their residual values over its estimated useful life. Freehold land is stated at cost less impairment losses. The estimated useful lives of the assets for the calculation of depreciation are as follows: Buildings 20 to 35 years Furniture and equipment 4 to 11 years Motor vehicles 3 to 7 years Computers 5 years When assets are sold or retired, their cost and accumulated depreciation are eliminated from the accounts and any gain or loss resulting from their disposal is recognised in the consolidated income statement. The carrying amounts of property and equipment are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, the assets are written down to their recoverable amounts and the impairment loss is recognised in the consolidated income statement. Expenditure incurred to replace a component of an item of property and equipment that is accounted for separately is capitalised and the carrying amount of the component that is replaced is written off. Other subsequent expenditure is capitalised only when it increases future economic benefits of the related item of property and equipment. All other expenditure is recognised in the consolidated income statement as the expense is incurred. Intangible assets Intangible assets represent separately identifiable non-monetary assets without physical substance arising from business combinations. Intangible assets are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is the fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. The useful lives of intangible assets are assessed as finite. Intangible assets with finite lives are amortised over the useful economic life, as mentioned below, and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful economic life is reviewed at least at each financial position date. Changes in the expected useful economic life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted for by changing the amortisation period or method, as appropriate, and are treated as changes in accounting estimates. The amortisation expense on intangible assets with finite lives is recognised in the consolidated income statement under “other expenses” consistent with the function of the intangible asset. Amortisation is calculated using the straight-line method to write down the cost of intangible assets to their residual values over their estimated useful economic lives as follows: Banking license 10 to 30 years Customer relationships and core deposits 5 to 10 years Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in the consolidated income statement when the asset is derecognised A previously recognised impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognised.

68

BURGAN BANK GROUP


21

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Leases The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at inception date: whether fulfillment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset.

Group as a lessee Leases that do not transfer to the Group substantially all the risks and benefits incidental to ownership of the leased items are operating leases. Operating lease payments are recognised as an expense in the consolidated income statement on a straight-line basis over the lease term. Contingent rental payable is recognised as an expense in the period in which they are incurred. Group as a lessor Leases where the Group does not transfer substantially all of the risk and benefits of ownership of the asset are classified as operating leases. Initial direct costs incurred in negotiating operating leases are added to the carrying amount of the leased asset and recognised over the lease term on the same basis as rental income. Contingent rents are recognised as revenue in the period in which they are earned. Business combinations and goodwill A business combination is the bringing together of separate entities or businesses into one reporting entity as a result of one entity, the acquirer, obtaining control of one or more other businesses. The acquisition method of accounting is used to account for business combinations. Under this method, the acquirer recognises, separately from goodwill, identifiable assets acquired, liabilities assumed and any non-controlling interests in the acquiree at the acquisition date. The identifiable assets acquired and the liabilities assumed at the acquisition date are measured at fair values. For each business combination, the Group elects whether to measure the non-controlling interests in the acquiree at fair value or at the proportionate share of the acquiree’s identifiable net assets. Acquisition costs incurred are expensed in the period in which they are incurred. If the business combination is achieved in stages, the acquisition date fair value of the acquirer’s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date through the consolidated income statement. It is then considered in the determination of goodwill. Goodwill arising in a business combination is recognised as of the acquisition date as the excess of :

a) the aggregate of the consideration transferred, the amount of any non-controlling interests in the acquiree measured at fair value or at the non controlling interest’s proportionate share of the acquiree’s identifiable net assets and the acquisition-date fair value of the acquirer’s previously held equity interest in the acquiree; over

b) the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed measured at their fair values.

If the aggregate consideration transferred is lower than the fair value of the net assets of the subsidiary acquired, the difference is recognised in consolidated income statement. Goodwill is allocated to each of the Group’s cash-generating units or for groups of cash generating units and is tested annually for impairment and is assesssed regularly whether there is any indication of impairment. Goodwill impairment is determined by assessing the recoverable amount of cash-generating unit to which goodwill relates. The recoverable value is the higher of the fair value less costs to sell and its value in use of the cash-generating unit, which is the net present value of estimated future cash flows expected from such cash-generating unit. If the recoverable amount of cash generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit prorated on the basis of the carrying amount of each asset in the unit. Any impairment loss recognised for goodwill is not reversed in the subsequent period. Where goodwill forms part of a cash-generating unit (group of cash generating units) and part of the operations within that unit is disposed off, the goodwill associated with the operation disposed off is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation.

69

BURGAN BANK GROUP


22

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) End of service indemnity Provision is made for amounts payable to employees under the Kuwait Labour Law, employee contracts and respective applicable laws in the countries where the subsidiaries operate. This liability, which is unfunded, represents the amount payable to each employee as a result of involuntary termination on the reporting date. Treasury shares The Bank’s holding in its own shares is stated at acquisition cost and is recognised in shareholders’ equity. Treasury shares are accounted for using the cost method. Under this method, the weighted average cost of the shares reacquired is charged to a contra account in the equity. When the treasury shares are reissued, gains are credited to a separate account in equity, “treasury shares reserve”, which is not distributable. Any realised losses are charged to the same account to the extent of the credit balance on that account. Any excess losses are charged to retained earnings then to the voluntary reserve and statutory reserve. Gains realised subsequently on the sale of treasury shares are first used to offset any previously recorded losses in the order of reserves, retained earnings and the treasury shares reserve account. These shares are not entitled to any cash dividend that the Bank may propose. The issue of bonus shares increases the number of shares proportionately and reduces the average cost per share without affecting the total cost of treasury shares. Share based compensation The Bank operates an equity settled share based compensation plan. The cost of share based compensation transactions with employees is measured by reference to the fair value at the date on which they are granted. The total amount to be expensed over the vesting period is determined by reference to the fair value of the options or shares on the date of grant using the Black Scholes model. Measurement inputs include share price on grant date, exercise price, volatility, risk free interest rate and expected dividend yield. At each reporting date, the Bank revises its estimates of the number of options that are expected to become exercisable. It recognises the impact of the revision of original estimates, if any, in the consolidated income statement, with a corresponding adjustment to equity. Other reserve Other reserve is used to record the effect of changes in ownership interest in subsidiaries, without loss of control. Revenue recognition Interest and similar income and expense Interest income and expense are recognised in the consolidated income statement for all financial instruments measured at amortised cost, interest bearing assets classified as available-for-sale and financial instruments designated at fair value through profit or loss using effective interest rate method. The effective interest rate is the rate that exactly discounts estimated future cash flows through the expected life of the financial instrument or, a shorter period, when appropriate, to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, all fees and points paid or received between parties to the contract, transaction costs and all other premiums or discounts are considered, but not future credit losses. Once a financial instrument is impaired, interest is thereafter recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. When the Group enters into an interest rate swap to change interest from fixed to floating (or vice versa) the amount of interest income or expense is adjusted by the net interest on the effective portion of the swap. All fees paid or recieved are treated as an integral part of the effective interest rate of financial instruments and are recognised over their lives, except when the underlying risk is sold to a third party, at which time it is recognised immediately. Fee and commission income Fee and commission earned for the provision of services over a period of time are accrued over that period. These fee include credit related fee and other management fees. Loan commitment fee and originating fee that are an integral part of the effective interest rate of a loan are recognised (together with any incremental cost) as an adjustment to the effective interest rate on loan. Dividend income Dividend income is recognised when the right to receive payment is established.

70

BURGAN BANK GROUP


23

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Foreign currency Each entity in the Group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. Transactions in foreign currencies are initially recorded at the spot rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the spot rate of exchange ruling at the reporting date. Any resultant gains or losses are recognised in the consolidated income statement. Non-monetary assets and liabilities in foreign currencies that are stated at fair value are translated to respective entity’s functional currency at the foreign exchange rates ruling on the dates that the values were determined. In case of non-monetary assets whose change in fair values are recognised directly in OCI, foreign exchange differences are recognised directly in OCI and for non-monetary assets whose change in fair value are recognised directly in the consolidated income statement, foreign exchange differences are recognised in the consolidated income statement. As at the reporting date, the assets and liabilities of subsidiaries are translated into the Bank’s presentation currency (KD) at the rate of exchange ruling on the reporting date, and their income statements are translated at the average exchange rates for the year. Exchange differences arising on translation are taken directly to OCI. On disposal of a foreign subsidiary, the deferred cumulative amount recognised in OCI relating to that particular subsidiary is recognised in the consolidated income statement. Any goodwill or fair value adjustments to the carrying amounts of assets and liabilities arising on acquisition are treated as assets and liabilities of the respective subsidiaries and translated at the rate of exchange ruling on the reporting date. Taxation National Labour Support Tax (NLST) The Bank calculates the NLST in accordance with Law No. 19 of 2000 and the Ministry of Finance Resolutions No. 24 of 2006 at 2.5% of taxable profit for the year. As per law, cash dividends from listed companies which are subjected to NLST have been deducted from the profit for the year. Kuwait Foundation for the Advancement of Sciences (KFAS) The Bank calculates the contribution to KFAS at 1% of profit for the year, in accordance with the modified calculation based on the Foundation’s Board of Directors resolution, which states that the Board of Directors’ remuneration and transfer to statutory reserve should be excluded from profit for the year when determining the contribution. Zakat Contribution to Zakat is calculated at 1% of the profit of the Bank in accordance with Law No. 46 of 2006 and the Ministry of Finance resolution No. 58/2007 effective from 10 December 2007. Taxation on overseas subsidiaries Taxation on overseas subsidiaries is calculated on the basis of the tax rates applicable and prescribed according to the prevailing laws, regulations and instructions of the countries where these subsidiaries operate. Income tax payable on taxable profit (‘current tax’) is recognised as an expense in the period in which the profits arise in accordance with the fiscal regulations of the respective countries in which the Group operates. Deferred tax is provided using the liability method on temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes at the reporting date. Deferred tax assets are recognised for all deductible temporary differences, the carry forward of unused tax credits and any unused tax losses. Deferred tax assets are recognised to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilised, except when the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss.

71

BURGAN BANK GROUP


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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Taxation (continued) Taxation on overseas subsidiaries (continued) The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Unrecognised deferred tax assets are re-assessed at each reporting date and are recognised to the extent that it has become probable that future taxable profits will allow the deferred tax asset to be recovered. Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current income tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority. Deferred tax assets and liabilities are measured using tax rates and applicable legislation at the reporting date. Segment information A segment is a distinguishable component of the Group that engages in business activities from which it earns revenue and incurs costs. The operating segments are used by the management of the Bank to allocate resources and assess performance. Operating segments exhibiting similar economic characteristics, product and services, class of customers where appropriate are aggregated and reported as reportable segments. Contingencies Contingent assets are not recognised in the consolidated financial statements, but are disclosed when an inflow of economic benefit is probable.

Contingent liabilities are not recognised in the consolidated financial statements, but are disclosed unless the possibility of an outflow of resources embodying economic benefit is remote.

Fiduciary assets Assets and related deposits held in trust or in a fiduciary capacity are not treated as assets or liabilities of the Group and accordingly are not included in the consolidated statement of financial position.

Significant accounting judgments, estimates and assumptions The preparation of the Group’s consolidated financial statements requires management to make judgements, estimates and assumptions that affect the reported amount of revenues, expenses, assets and liabilities, and the accompanying disclosures, as well as the disclosure of contingent liabilities. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods.

Judgements In the process of applying the Group’s accounting policies, management has made the following judgements, apart from those involving estimations, which have the most significant effect on the amounts recognised in the consolidated financial statements:

Classification of financial assets On acquisition of financial assets, management decides whether it should be classified as investments at fair value through profit or loss or investments available for sale or loans and receivables or held to maturity.

Impairment of financial assets available for sale The Group treats available for sale equity investments as impaired when there has been a significant or prolonged decline in the fair value below its cost or where other objective evidence of impairment exists. The determination of what is “significant” or “prolonged” requires considerable judgement. In making this judgement, the Group evaluates, among other factors, historical share price movements and duration and extent to which the fair value of an investment is less than its cost.

Deferred tax assets Deferred tax assets are recognised in respect of tax losses to the extent that it is probable that future taxable profits will be available against which the losses can be utilised. Judgment is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and level of future taxable profits, together with future tax planning strategies.

72

BURGAN BANK GROUP


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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Significant accounting judgments, estimates and assumptions (continued) Estimation uncertainty and assumptions The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. The Group based its assumptions and estimates on parameters available when the consolidated financial statements were prepared. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances beyond the control of the Group. Such changes are reflected in the assumptions when they occur.

Impairment of goodwill The Group determines whether goodwill is impaired at least on an annual basis. This requires an estimation of the value in use or fair value less cost to sell of the cash-generating units to which the goodwill is allocated. Estimating the value in use requires the Group to make an estimate of the expected future cash flows from the cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows. Fair values of assets and liabilities including intangible assets Considerable judgement by management is required in the estimation of the fair value of the assets including intangible assets with finite useful life, liabilities and contingent liabilities acquired. Impairment losses on loans and advances The Group reviews its loans and advances on a quarterly basis to assess whether a provision for impairment should be recorded in the consolidated income statement. In particular, considerable judgement by management is required in the estimation of the amount and timing of future cash flows when determining the level of provisions required. Such estimates are necessarily based on assumptions about several factors involving varying degrees of judgment and uncertainty, and actual results may differ resulting in future changes to such provisions. Fair value measurement of financial instruments When the fair values of financial assets and financial liabilities recorded in the statement of financial position cannot be measured based on quoted prices in active markets, their fair value is measured using valuation techniques including the DCF model. The inputs to these models are taken from observable markets where possible, but where this is not feasible, a degree of judgement is required in establishing fair values. Judgements include considerations of inputs such as liquidity risk, credit risk and volatility. Any changes in these estimates and assumptions as well as the use of different, but equally reasonable estimates and assumptions may have an impact on carrying amounts of loans and receivables and investments available for sale.

73

BURGAN BANK GROUP


26

3. CASH AND CASH EQUIVALENTS

2013

KD 000’s 2012

KD 000’s Cash on hand and in current account with banks and OFIs 556,136 400,172 Balances with the CBK 144 807 Due from banks and OFIs maturing within thirty days 448,010 386,489

───────── ───────── 1,004,290 787,468 ═════════ ═════════

4. DUE FROM BANKS AND OTHER FINANCIAL INSTITUTIONS

2013

KD 000’s 2012

KD 000’s Banks 675,441 524,522 OFIs 105,198 144,583

────────── ────────── Less: 780,639 669,105 Provision for impairment (note 5) (80,556) (58,325)

────────── ────────── 700,083 610,780 ══════════ ══════════

5. LOANS AND ADVANCES TO CUSTOMERS a) Balances

2013

KD 000’s 2012

KD 000’s Corporate 3,574,448 3,052,462 Retail 515,917 445,591

───────── ───────── Less: 4,090,365 3,498,053 Provision for impairment (135,517) (123,217)

───────── ───────── 3,954,848 3,374,836 ═════════ ═════════

b) Provision for impairment

Banks

and OFIs Corporate Retail Total KD 000's KD 000's KD 000's KD 000's At 1 January 2013 58,548 122,986 22,226 203,760 Exchange adjustment - (5,739) (423) (6,162) Amounts written off (16,631) (38,199) (195) (55,025) Charged to income statement 38,875 51,331 (293) 89,913 ───────── ───────── ───────── ───────── At 31 December 2013 80,792 130,379 21,315 232,486 ═════════ ═════════ ═════════ ═════════

74

BURGAN BANK GROUP


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5. LOANS AND ADVANCES TO CUSTOMERS (continued)

Banks

and OFIs Corporate Retail Total KD 000's KD 000's KD 000's KD 000's (Restated) (Restated) (Restated) At 1 January 2012 62,177 83,360 30,815 176,352 On acquisition of a subsidiary * - 29,344 5,287 34,631 Exchange adjustment 42 (50) - (8) Amounts written off (18,585) (9,190) (15,533) (43,308) Charged to income statement 14,914 19,522 1,657 36,093 ───────── ───────── ───────── ───────── At 31 December 2012 58,548 122,986 22,226 203,760 ═════════ ═════════ ═════════ ═════════ * Loans and advances to customers were acquired at fair value (note 8). Provision for impairment includes KD 16,413 thousand (31 December 2012: KD 22,218 thousand) including provision on OFI’s amounting to KD 236 thousand (31 December 2012: KD 223 thousand), being provision for non-cash facilities reported under other liabilities (note 11). The impairment provision for credit facilities complies in all material respects with the specific provision requirements of the CBK and IFRS. In March 2007, the CBK issued a circular amending the basis of making minimum general provisions on facilities changing the rate from 2% to 1% for cash facilities and 0.5% for non cash facilities. The revised rates are applied effective from 1 January 2007 on the net increase in facilities, net of certain restricted categories of collateral during the reporting period. The general provision as of 31 December 2006 in excess of the present 1% for cash facilities and 0.5% for non cash facilities amounts to KD 16,154 thousand and is retained as a general provision until further directive from the CBK. Interest income on impaired loans and advances is immaterial. The analysis of the provision for impairment based on specific and general provision is as follows:

2013

KD 000’s 2012

KD 000’s Specific provision 60,567 68,701 General provision 171,919 135,059

───────── ───────── 232,486 203,760 ═════════ ═════════

Non-performing loans to customers:

2013

KD 000’s 2012

KD 000’s Loans and advances to customers 173,660 247,294 Provisions 52,824 57,834 Collaterals 97,723 180,786

75

BURGAN BANK GROUP


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6. INVESTMENT SECURITIES

2013

KD 000’s 2012

KD 000’s Financial assets at fair value through profit or loss Investments held for trading Debt securities - Quoted investments 12,143 14,780 Equity securities - Quoted investments 4,132 2,318

Investments designated at fair value through profit or loss - Equity securities 8,643 - - Managed funds 61,109 60,922

────────── ────────── Total financial assets at fair value through profit or loss 86,027 78,020

────────── ──────────

Financial assets available for sale Debt securities - Quoted 180,220 114,882 - Unquoted 26,144 22,300

────────── ────────── 206,364 137,182 ────────── ──────────

Equity securities - Quoted 18,812 22,108 - Unquoted 81,100 59,905

────────── ────────── 99,912 82,013 ────────── ──────────

Total financial assets available for sale 306,276 219,195 ────────── ──────────

Financial assets held to maturity Debt securities - Quoted 20,923 13,806 - Unquoted 8 -

────────── ────────── Total financial assets held to maturity 20,931 13,806

────────── ────────── Investment in an associate 8,168 -

────────── ────────── Total investment securities 421,402 311,021

══════════ ══════════ During the year, the Group acquired FIMBank p.l.c, a company domiciled in Malta and accounted as investment in an associate. FIMBank is involved in providing trade finance solutions to corporates, banks and individuals. The Group's effective equity interest in FIMBank as at 31 December 2013 is 19.54%. As a result of this acquisition, the Group recorded a gain on bargain purchase of KD 1,807 thousand, on a provisional basis, included under 'Other income' in the consolidated income statement. The Group exercises significant influence over FIMBank through its representation in the Board of Directors of FIMBank.

76

BURGAN BANK GROUP


29

7. OTHER ASSETS

2013

KD 000’s 2012

KD 000’s (Restated) Accrued interest receivable 59,529 47,569 Prepaid expenses 5,612 4,989 Assets pending sale * 49,484 34,930 Deferred tax assets 6,791 6,035 Taxation paid in advance 5,085 3,172 Sundry debtors 61,613 7,437 Other balances ** 50,024 52,998

────────── ────────── 238,138 157,130 ══════════ ══════════

* The fair value of real estate assets included in assets pending for sale are based on valuations performed by an accredited independent valuers by using market comparable method. As the significant valuation inputs used are based on unobservable market data these are classified under level 3 fair value hierarchy. However, the impact on the consolidated income statement would be immaterial if the relevant risk variables used to fair value were altered by 5%. ** Other balances include an amount of KD 15,000 thousand (31 December 2012: KD 15,000 thousand) representing capital prepayment for the establishment of a new company. 8. BUSINESS COMBINATION AND INTANGIBLE ASSETS

Goodwill KD 000’s

Other intangible

assets KD 000’s

Total

KD 000’s Cost At 1 January 2013 (restated) 85,733 115,299 201,032 Exchange adjustment 317 (1,407) (1,090)

────── ────── ────── At 31 December 2013 86,050 113,892 199,942

══════ ══════ ══════ Accumulated amortisation At 1 January 2013 - 22,047 22,047 Charge for the year - 6,930 6,930

────── ────── ────── At 31 December 2013 - 28,977 28,977

══════ ══════ ══════ Net book value At 31 December 2012 (As originally stated) 85,733 91,233 176,966 ══════ ══════ ══════ As 31 December 2012 (Restated) 85,733 93,252 178,985

══════ ══════ ══════ At 31 December 2013 86,050 84,915 170,965

══════ ══════ ══════

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BURGAN BANK GROUP


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8. BUSINESS COMBINATION AND INTANGIBLE ASSETS (continued) The carrying amounts of goodwill and other intangible assets allocated to each CGU are as follows:

Goodwill KD 000’s

Other intangible assets

KD’000s Total

KD 000’s

Banking license

Customer relationship

Core customer deposits Total

JKB 70,132 38,303 5,094 1,164 44,561 114,693 AGB 4,709 14,644 1,093 132 15,869 20,578 BoB 6,357 6,972 142 93 7,207 13,564 TIB 4,852 9,123 - 21 9,144 13,996 BBT - - 7,223 911 8,134 8,134

────── ────── ────── ────── ────── ────── At 31 December 2013 86,050 69,042 13,552 2,321 84,915 170,965

══════ ══════ ══════ ══════ ══════ ══════ JKB 69,880 39,494 6,168 1,411 47,073 116,953 AGB 4,686 15,389 1,301 158 16,848 21,534 BoB 6,331 8,142 283 187 8,612 14,943 TIB 4,836 9,670 - 35 9,705 14,541 BBT - - 9,780 1,234 11,014 11,014

────── ────── ────── ────── ────── ────── At 31 December 2012 85,733 72,695 17,532 3,025 93,252 178,985

══════ ══════ ══════ ══════ ══════ ══════ Impairment testing of goodwill The carrying value of goodwill is tested for impairment on an annual basis (or more frequently if evidence exists that goodwill might be impaired) by estimating the recoverable amount of the cash generating unit ("CGU") to which these items are allocated using value-in-use calculations. These calculations use pre-tax cash flow projections based on financial budgets approved by management over a five years period and a relevant terminal growth rate of 4% to 7% (31 December 2012: 4% to 7%). These cash flows were then discounted using a pre-tax discount rate of 15% to 30% (31 December 2012: 11% to 17%) to derive a net present value which is compared to the carrying value. The discount rate used is pre-tax and reflects specific risks relating to the relevant CGU. The Group has also performed a sensitivity analysis by varying these input factors by a reasonable possible margin. Based on such analysis, there are no indications that goodwill is impaired. Other intangibles During the previous year, the Bank acquired 99.26% equity interest in BBT and accordingly the entity has become subsidiary of the Group and has been consolidated from the date of exercise of control i.e., 21 December 2012. BBT is incorporated in Turkey and is operating under the supervision of Banking Regulation and Supervision Agency (BRSA). The main activity of BBT is banking and related financial operations in Turkey. The consideration for the acquisition was paid based on the preliminary closing date Net Asset Value (“NAV”) as of the closing date. Under the terms of the Share Purchase Agreement, a payment constituting an adjustment to the consideration has been made after the agreement or determination of the closing accounts NAV. The consideration payable has been adjusted based on the above outcome. BBT had been consolidated based on the provisional values assigned to the identifiable assets and liabilities as on the acquisition date and the management was in the process of determining the fair values of assets acquired and liabilities assumed. During the current year, the Bank completed the purchase price allocation (“PPA”) exercise for BBT and revised the value of the customer relationship identified provisionally for the year ended 31 December 2012 to KD 9,845 thousand and in addition identified core customer deposits of KD 1,242 thousand as intangible assets. The fair value of other assets and liabilities acquired do not materially differ from their provisionally determined fair values except as disclosed below in the table:

78

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8. BUSINESS COMBINATION AND INTANGIBLE ASSETS (continued) The fair values of the assets acquired and liabilities assumed, at the acquisition date, after the PPA exercise are summarised as follows:

Provisional fair values

PPA and other

adjustments

Fair values after PPA and

other adjustments

KD 000’s KD 000’s KD 000’s Assets Cash and cash equivalents 89,169 - 89,169 Loans and advances to customers 516,585 (9,634) 506,951 Investment securities 71,056 - 71,056 Other assets 24,866 3,095 27,961 Property and equipment 7,402 736 8,138 Other intangible assets 8,995 2,092 11,087 ─────── ─────── ─────── 718,073 (3,711) 714,362 ─────── ─────── ─────── Liabilities Due to banks 49,234 - 49,234 Due to other financial institutions 352 - 352 Deposits from customers 506,472 - 506,472 Other borrowed funds 23,095 - 23,095 Other liabilities 26,738 (31) 26,707 ─────── ─────── ───────

605,891 (31) 605,860 ─────── ─────── ─────── Net assets acquired 112,182 (3,680) 108,502 ═══════ ═══════ ═══════ Consideration settled in cash 99,350 - 99,350 Consideration settled in cash during the year 7,395 (3,653) 3,742 Non controlling interests in the subsidiary acquired 830 (27) 803 ─────── ─────── ─────── 107,575 (3,680) 103,895 Net assets acquired (112,182) 3,680 (108,502) ─────── ─────── ─────── Gain on bargain purchase (4,607) - (4,607) ═══════ ═══════ ═══════

KD 000’s KD 000’s KD 000’s Consideration settled in cash (99,350) - (99,350) Cash and cash equivalents in the subsidiary acquired 89,169 - 89,169 ─────── ─────── ─────── Cash outflow on acquisition (10,181) - (10,181) ═══════ ═══════ ═══════

Accordingly, the relevant financial information for the year ended 31 December 2012 has been restated to reflect the adjustments of PPA exercise as shown below: Intangible assets

Goodwill

Other intangible

assets

Total intangible

assets

Non controlling

interests

Retained earnings

KD 000’s KD 000’s KD 000’s KD 000’s KD 000’s At 31 December 2012 (As originally stated) 85,733 91,233 176,966

129,133 93,141

PPA adjustment - 2,019 2,019 (27) - ───────── ───────── ───────── ───────── ───────── At 31 December 2012 (Restated) 85,733 93,252 178,985 129,106 93,141 ═══════ ═══════ ═══════ ═══════ ═══════ The amortisation has been included in other expenses in the consolidated income statement.

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9. MATERIAL PARTLY-OWNED SUBSIDIARIES The management of the Bank has concluded that JKB and BoB are subsidiaries which have non-controlling interests that are material to the Group. Financial information of these subsidiaries as of 31 December 2013 is provided below: Non-controlling interests to BB Group JKB BoB 2013 2012 2013 2012 KD 000’s KD 000’s KD 000’s KD 000’s Accumulated balances 98,006 93,090 37,481 28,251 Profit attributable 7,806 4,816 2,988 1,856 Dividends 3,872 3,835 - - The summarised financial informations provided below. This information is based on amounts before inter-company eliminations. Summaried income statement: JKB BoB 2013 2012 2013 2012 KD 000’s KD 000’s KD 000’s KD 000’s Operating income 50,422 46,169 15,630 11,582 Operating expense (16,438) (14,235) (7,088) (5,737) Operating profit before provision 33,984 31,934 8,542 5,845 Profit for the year 18,802 15,289 6,779 4,893 Total comprehensive income 20,300 16,866 6,827 4,987

Summarised statement of financial position: JKB BoB 2013 2012 2013 2012 KD 000’s KD 000’s KD 000’s KD 000’s Loans and advances to customers 526,253 559,077 52,510 33,530 Customer deposits 664,837 601,546 351,016 228,755 Total assets 1,009,982 950,235 433,782 283,774 Total liabilities 853,747 806,783 364,126 234,205 Total equity 156,235 143,452 69,656 49,569 Net increase in cash and cash equivalents

50,682

7,606

50,322

85,521

80

BURGAN BANK GROUP


33

10. OTHER BORROWED FUNDS

Effective

interest rate 2013

KD 000’s 2012

KD 000’s Subordinated notes* 8.125% 109,692 109,084 Subordinated bonds (Fixed tranch)** 5.650% 40,703 40,580 Subordinated bonds (Floating tranch capped at 6.650%)** CBK +3.9% 58,331 58,380 Other borrowings – subsidiaries 0.66% - 3.71% 18,871 22,941

────────── ────────── 227,597 230,985 ══════════ ══════════

* In 2010, Burgan Finance No. 1 (Jersey) Limited (incorporated with limited liability under the laws of the Jersey), a special purpose entity established by the Bank, has issued US$ 400 million 7.875 per cent subordinated notes due 2020 (the “Notes”) at a discounted price of 98.3 per cent of the principal amount. The Notes meet the requirements to be treated as Tier II eligible capital under Basel II regulations issued by the CBK. ** In 2012, the Bank issued KD 100 million bonds due 2022 (the “Subordinated bonds”) at the principal amount. The Subordinated bonds meet the requirements to be treated as Tier II eligible capital under Basel II regulations issued by the CBK. The Subordinated bonds and Notes are callable in whole, or, in part, at the option of the Bank after 5 years from the date of the issuance (subject to certain conditions being satisfied and prior approval of the CBK). 11. OTHER LIABILITIES

2013

KD 000’s 2012

KD 000’s Accrued interest payable 45,773 34,110 Staff benefits 13,448 13,362 Provision for non-cash credit facilities (note 5) 16,413 22,218 Clearing cheques and balances 38,472 21,206 Income received in advance 7,238 5,446 Other payable and accruals 29,929 34,785 Deferred tax liabilities 1,045 146 Taxation payable 16,795 16,547 Other balances 49,077 54,299

────────── ────────── 218,190 202,119 ══════════ ══════════

81

BURGAN BANK GROUP


34

12. EQUITY AND RESERVES

a) The authorised, issued and fully paid up share capital of the Bank comprises 1,622,215,539 shares (31 December 2012: 1,544,967,180 shares) of 100 fils each.

At the annual general meeting of the shareholders held on 1 April 2013, 5% bonus shares (2012: 5% bonus shares) for the year ended 31 December 2012 was approved and issued. This resulted in an increase in the number of authorised and issued shares by 77,248,359 shares (2012: 73,569,870 shares) and share capital by KD 7,725 thousand (2012: KD 7,357 thousand).

b) The share premium and treasury shares reserve are not available for distribution.

c) The Commercial Companies Law and the Bank’s articles of association require that 10% of the profit for

the year attributable to equity holders of the Bank before Board of Directors remuneration, NLST, KFAS and Zakat be transferred annually to statutory reserve. The Bank may resolve to discontinue such annual transfers when the reserve equals 50% of paid up share capital. Distribution of statutory reserve is limited to the amount required to enable the payment of dividend of 5% of share capital in years when accumulated profits are not sufficient for the payment of a dividend of that amount.

d) The articles of association of the Bank requires an amount of not less than 10% of the profit for the year

attributable to equity holders of the Bank before Board of Directors remuneration, NLST, KFAS and Zakat be transferred annually to the voluntary reserve. There is no restriction on distribution of this reserve.

e) Treasury shares

2013 2012 Number of shares held 79,392,917 73,910,548

══════════ ══════════ Percentage of shares held 4.89% 4.78% ══════════ ══════════ Market value KD 000’s 43,666 38,433

══════════ ══════════

f) Proposed dividends The Board of Directors has recommended to distribute cash dividend of 7 fils per share (2012: 10 fils) and 7% bonus shares (2012: 5%) for the financial year ended 31 December 2013. Subject to being approved at the annual general meeting ("AGM") of the shareholders, the cash dividend and bonus shares shall be payable to shareholders registered in the Bank's records as of the AGM date.

13. FEE AND COMMISSION INCOME Fee and commission income includes KD 1,090 thousand (31 December 2012: KD 1,124 thousand) being fee income related to fiduciary activities. 14. NET INVESTMENT INCOME

2013

KD 000’s 2012

KD 000’s Financial assets at fair value through profit or loss: – net gain on investments held for trading 662 3 – net gain on investments designated at fair value through profit or loss 6,451 1,151

───────── ───────── 7,113 1,154

Net gain from financial assets available for sale 4,579 863 Share of result from an associate (426) -

───────── ───────── 11,266 2,017 ═════════ ═════════

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35

15. TAXATION

2013

KD 000’s 2012

KD 000’s NLST 288 1,262 KFAS 90 443 Zakat 87 498 Taxation arising from overseas subidiaries 15,227 13,781

────────── ────────── 15,692 15,984 ══════════ ══════════

Components of taxation arising from overseas subsidiaries are as follows:

2013

KD 000’s 2012

KD 000’s Current tax 17,180 15,085 Deferred tax (1,953) (1,304)

────────── ────────── 15,227 13,781 ══════════ ══════════

The tax rate applicable to the taxable subsidiary companies is in the range of 15% to 30% (2012: 15% to 30%) whereas the effective income tax rate for the year ended 31 December 2013 is in the range of 15% to 30% (2012: 15% to 30%). For the purpose of determining the taxable results for the year, the accounting profit of the overseas subsidiary companies were adjusted for tax purposes. Adjustments for tax purposes include items relating to both income and expense. The adjustments are based on the current understanding of the existing laws, regulations and practices of each overseas subsidiary companies jurisdiction. Deferred tax assets / liabilities are part of other assets / liabilities in the consolidated statement of finnacial position. 16. EARNINGS PER SHARE Basic and diluted earnings per share is computed by dividing the profit for the year attributable to equity holders of the Bank by the weighted average number of shares outstanding during the year less treasury shares. The computation of basic and diluted earnings per share is as follows: 2013 2012 KD 000’s KD 000’s (Restated)

Profit for the year attribuitable to equity holders of the Bank 20,102 55,600 ══════════ ══════════ Shares Shares

Weighted average number of outstanding shares, net of treasury shares 1,544,322,545 1,546,013,624 ────────── ──────────

Basic and diluted earnings per share (fils) 13.0 36.0 ══════════ ══════════ The basic and diluted earnings per share for the comparative year presented have been restated for the effect of bonus shares issued on 1 April 2013 (note 12).

83

BURGAN BANK GROUP


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17. SEGMENT INFORMATION For management purposes, the Group organises its operations by geographic territory in the first instance, primarily Domestic and International. All operations outside Kuwait are classified as International. Within its domestic operations, the Group is organised into the following key business segments.

Corporate banking: provides comprehensive product and services to corporate customers including lending, deposits, trade services, foreign exchange, advisory services and others.

Private and retail banking: provides wide range of products and services to retail and private bank customers including loans, deposits, credit and debit cards, foreign exchange, and others.

Treasury, investment banking, financial institutions and others: includes treasury asset liability and liquidity management, investment services and management, fund management and any residual of transfer pricing. It also provides products and services to banks and financial institutions including money markets, lending, deposits, foreign exchange and others.

Executive Management monitors the operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on segment result after provisions which in certain respects is measured differently from operating profit or loss in the consolidated financial statements. The table below presents income and results and certain assets and liabilities information regarding the Group’s operating segments. Kuwait Operations International

Operations Group

Corporate banking KD 000’s

Retail and

Private banking KD 000’s

Treasury and investment

banking KD 000’s

Total KD 000's

KD 000's Total KD 000’s

31 December 2013 Net interest income 44,546 32,821 6,303 83,670 81,765 165,435 ───────── ───────── ───────── ───────── ───────── ───────── Segment operating income 58,646

37,715 21,288 117,649 135,910 253,559

───────── ───────── ───────── ───────── ───────── ───────── Depreciation and amortisation (357)

(1,533) (332) (2,222) (11,635) (13,857)

───────── ───────── ───────── ───────── ───────── ───────── Segment result before provisions 51,312

21,962 15,295 88,569 58,498 147,067

Provision for impairment of loans and advances (11,592)

(23,278) (6,315) (41,185) (17,396) (58,581)

Provision for impairment of investment securities -

- (1,592) (1,592) (1,371) (2,963)

───────── ───────── ───────── ───────── ───────── ───────── Segment result after provisions 39,720

(1,316) 7,388 45,792 39,731 85,523

───────── ───────── ───────── ───────── ───────── ───────── Unallocated expenses (6,344) - (6,344) Unallocated provisions (31,332) - (31,332) ───────── ───────── ───────── Profit for the year before taxation

8,116

39,731

47,847

───────── ───────── ═════════ Total assets 1,401,979 1,050,716 1,512,165 3,964,860 3,189,891 7,154,751 ═════════ ═════════ ═════════ ═════════ ═════════ ═════════ Total liabilities 485,200 829,587 2,852,169 4,166,956 2,367,968 6,534,924 ═════════ ═════════ ═════════ ═════════ ═════════ ═════════ Intangible assets - - - - 170,965 170,965 ═════════ ═════════ ═════════ ═════════ ═════════ ═════════

84

BURGAN BANK GROUP


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17. SEGMENT INFORMATION (continued)

Kuwait Operations International Operations Group

Corporate banking

KD 000’s

Retail and

Private banking

KD 000’s

Treasury and investment

banking KD 000’s

Total KD 000's

KD 000's Total

KD 000’s 31 December 2012 Net interest income 39,025 21,294 3,838 64,157 54,783 118,940 ───────── ───────── ───────── ───────── ───────── ───────── Segment operating income 52,482 24,858 20,894 98,234 91,882 190,116 ───────── ───────── ───────── ───────── ───────── ───────── Depreciation and amortisation (348)

(1,792) (381) (2,521) (8,431) (10,952)

───────── ───────── ───────── ───────── ───────── ───────── Segment result before provisions 45,310

9,278 14,886 69,474 52,151 121,625

Provision for impairment of loans and advances (1,625)

(3,436) (3,313) (8,374) (16,479) (24,853)

Provision for impairment of investment securities -

- (12) (12) (4,009) (4,021)

───────── ───────── ───────── ───────── ───────── ───────── Segment result after provisions 43,685

5,842 11,561 61,088 31,663 92,751

───────── ───────── ───────── ───────── ───────── ───────── Unallocated expenses (2,691) - (2,691) Unallocated provisions (11,240) - (11,240) ───────── ───────── ───────── Profit for the year before taxation

47,157

31,663

78,820

───────── ───────── ═════════ Total assets 1,256,339 794,388 1,315,483 3,366,210 2,606,728 5,972,938 ═════════ ═════════ ═════════ ═════════ ═════════ ═════════ Total liabilities 485,714 727,742 2,153,896 3,367,352 1,985,755 5,353,107 ═════════ ═════════ ═════════ ═════════ ═════════ ═════════ Intangible assets - - - 178,985 178,985 ═════════ ═════════ ═════════ ═════════ ═════════ ═════════ 18. TRANSACTIONS WITH RELATED PARTIES The Group has entered into transactions with certain related parties (parent company, directors and key management personnel of the Group and entities controlled, jointly controlled or significantly influenced by such parties) who were customers of the Group during the year. The “Others” column in the table below mainly represent transactions with other related parties that are either controlled or significantly influenced by the parent company. The terms of these transactions are on commercial basis and as approved by the Group’s management. The balances and transactions are as follows:

85

BURGAN BANK GROUP


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18. TRANSACTIONS WITH RELATED PARTIES (continued)

Parent company KD 000's

Associate KD 000's

Others KD 000's

2013 KD 000s

2012 KD 000s

Due from banks and other financial institutions - 42,308

140,952 183,260 106,926

Loans and advances to customers - - 635,178 635,178 322,092 Investment securities 1,339 - 39,813 41,152 40,761 Investment securities managed by a related party* - -

61,055 61,055 64,705

Due to banks - - 23,681 23,681 7,177 Due to other financial institutions - - 26,282 26,282 25,121 Deposits from customers 3,729 - 46,800 50,529 53,589 Commitments, contingent liabilities

and derivatives

Letters of credit - - 97 97 1,706 Letters of guarantee - - 11,185 11,185 8,018 Derivative financial instruments - - 12,175 12,175 -

Transactions Interest income - 128 18,998 19,126 19,158 Interest expense 152 - 561 713 1,403 Fee and commission income 24 - 1,000 1,024 2,432 Fee and commission expense - - 255 255 294 Dividend income 108 - 457 565 421 Other expense - - 1,100 1,100 -

No. of Board members

or executive staff 2013

KD 000’s

2012

KD 000’s Board members Loans and advances to customers 3 3,128 450 Deposits from customers 8 1,245 1,581

Executive staff Loans and advances to customers 24 639 478 Deposits from customers 50 2,186 1,383 Letters of guarantee 1 1 1 * During the previous year the Bank acquired a Private Equity Portfolio from a related party for KD 59,120 thousand. Key management compensation Remuneration paid or accrued in relation to “key management” (deemed for this purpose to comprise Directors in relation to their committee service, the Chief Executive Officer and other Senior Officers), recognised as an expense during the year, was as follows:

2013 2012 KD 000’s KD 000’s Short term employee benefits – including salary and bonus 5,575 3,357 Accrual for end of service indemnity 640 348 Accrual for committee services 300 280 Accrual for cost of long term incentive rights 603 493 ───────── ───────── 7,118 4,478

═════════ ═════════

86

BURGAN BANK GROUP


39

19. COMMITMENTS AND CONTINGENT LIABILITIES

2013

KD 000’s 2012

KD 000’s Acceptances 59,447 46,077 Letters of credit 434,126 379,150 Letters of guarantee 714,844 684,127 Undrawn lines of credit 245,744 216,284 Other commitments 49,376 53,935

────────── ────────── 1,503,537 1,379,573 ══════════ ══════════

The primary purpose of these instruments is to ensure that funds are available to customers as required. Acceptances, standby letters of credit and guarantees, which represent irrevocable assurances that the Group will make payments in the event that the customer cannot meet its obligations to third parties, carry the same credit risk as loans. Documentary and commercial letters of credit, which are undertaken by the Group on behalf of the customer authorising a third party to draw drafts on the Group up to a stipulated amount under specific terms and conditions, are collateralised by the underlying shipments of goods to which they relate and therefore carry less risk than a direct borrowing. Commitments to extend credit represent unused portions of authorisations to extend cash credit. With respect to credit risk on commitments to extend credit, the Group is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments since most of these commitments will expire or terminate without being funded. The Group makes available to its customers guarantees which may require that the Group makes payments on their behalf and enters into commitments to extend credit lines to secure their liquidity needs. Such payments are collected from customers based on the terms of the letter of credit. They expose the Group to similar risks to loans and these are mitigated by the same control processes and policies. 20. DERIVATIVE FINANCIAL INSTRUMENTS In the ordinary course of business the Group enters into various types of transactions that involve derivative financial instruments. Derivatives are carried at fair value. Positive fair value represents the cost of replacing all derivative transactions with a fair value in the Groups’ favour had the rights and obligations arising from that derivative instrument been closed in an orderly market transaction at the reporting date. Credit risk in respect of derivative financial instruments is limited to the positive fair value of instruments. Negative fair value represents the cost to the Groups’ counter parties of replacing all their transactions with the Group. The Group deals in forward foreign exchange contracts, swaps and options for customers and to manage its foreign currency positions and cash flows. The table below shows the fair value of derivative financial instruments, recorded as assets or liabilities, together with their notional amounts analysed by the terms of maturity. The notional amount, recorded gross, is the amount of a derivative’s underlying asset, reference rate or index and is the basis upon which changes in the value of derivatives are measured. The notional amounts indicate the volume of transactions outstanding at the year end and are indicative of neither the market risk nor the credit risk. The credit risk exposure is managed as part of the overall borrowers lending limits, together with potential exposures from market movements. Derivatives held for trading Derivative transactions for customers and derivatives used for hedging purpose but which do not meet the qualifying criteria for hedge accounting are classified as ‘Derivatives held for trading’. The risk exposures on account of derivative transactions for customers are covered by entering in to similar transactions with counter parties or by other risk mitigating transactions.

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BURGAN BANK GROUP


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20. DERIVATIVE FINANCIAL INSTRUMENTS (continued) Forward foreign exchange contracts Forward foreign exchange contracts are contractual agreements to either buy or sell a specified currency, at a specific price and date in the future, and are customised contracts transacted in the over-the-counter market. Options Options are contractual agreements that convey the right, but not the obligation, for the purchaser either to buy or sell a specified amount of a financial instrument at a fixed price, either at a fixed future date or at any time within a specified period. The Group purchases and sells options through regulated exchanges and in the over–the–counter markets. Options purchased by the Group provide the Group with the opportunity to purchase (call options) or sell (put options) the underlying asset at an agreed–upon value either on or before the expiration of the option. The Group is exposed to credit risk on purchased options only to the extent of their carrying amount, which is their fair value. Options written by the Group provide the purchaser the opportunity to purchase from or sell to the Group the underlying asset at an agreed–upon value either on or before the expiration of the option. Swaps Swaps are contractual agreements between two parties to exchange streams of payments over time based on specified notional amounts, in relation to movements in a specified underlying index such as an interest rate, foreign currency rate or equity index. Interest rate swaps relate to contracts taken out by the Bank with OFIs in which the Group either receives or pays a floating rate of interest, respectively, in return for paying or receiving a fixed rate of interest. The payment flows are usually netted against each other, with the difference being paid by one party to the other. In a currency swap, the Group pays a specified amount in one currency and receives a specified amount in another currency. Currency swaps are mostly gross–settled. Notional amount

31 December 2013 Positive fair

value Negative fair

value Within 1

year Over 1 year Total

KD 000’s KD 000’s KD 000’s KD 000’s KD 000’s Derivatives held for trading: (non-qualifying hedges) Forward swaps/ foreign exchange contracts 8,019 (3,264)

375,950 389 376,339

Interest rate swaps 2,032 (266) 14,673 93,766 108,439 Options 14,172 (14,118) 423,858 20,163 444,021 ────────── ────────── ────────── ────────── ────────── 24,223 (17,648) 814,481 114,318 928,799 ────────── ────────── ────────── ────────── ────────── Notional amount

31 December 2012 Positive fair

value Negative fair

value Within 1

year Over 1 year Total

KD 000’s KD 000’s KD 000’s KD 000’s KD 000’s Derivatives held for trading: (non-qualifying hedges) Forward swaps/ foreign exchange contracts 1,048 (1,627)

131,850 1,034 132,884

Interest rate swaps 812 (479) 7,366 40,664 48,030 Options 1,570 (1,570) 223,339 12,941 236,280 ────────── ────────── ────────── ────────── ────────── 3,430 (3,676) 362,555 54,639 417,194 ────────── ────────── ────────── ────────── ──────────

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BURGAN BANK GROUP


41

21. FAIR VALUE MEASUREMENT Fair value of all financial instruments are not materially different from their carrying values. For financial assets and financial liabilities that are liquid or having a short-term maturity (less than three months) it is assumed that the carrying amounts approximate to their fair value. This assumption is also applied to demand deposits, savings accounts without a specific maturity and variable rate financial instruments. Fair value measurement hierarchy for financial assets and financial liabilities that are carried at fair value as at 31 December 2013 is as follows: Level 1 Level 2 Level 3 Total KD ′000 KD ′000 KD ′000 KD ′000 Financial assets at fair value through profit or loss: Financial assets held for trading : Equity securities 4,132 - - 4,132 Debt securities 12,143 - - 12,143 Derivative financial instuments:

- Forward swaps/foreign exchange contracts - 8,019 - 8,019

- Interest rate swaps - 2,032 - 2,032 - Options - 14,172 - 14,172

Financial assets designated at fair value through profit or loss : Equity securities 8,643 - - 8,643 Managed funds - - 61,109 61,109 Financial assets available for sale : Equity securities 18,812 - 81,100 99,912 Debt securities 180,220 - 26,144 206,364 Liabilities measured at fair value Financial liabilites at fair value through profit or loss: Derivative financial instuments:

- Forward swaps / foreign exchange contracts - 3,264 - 3,264

- Interest rate swaps - 266 - 266 - Options - 14,118 - 14,118

89

BURGAN BANK GROUP


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21. FAIR VALUE MEASUREMENT (continued) Fair value measurement hierarchy for financial assets and financial liabilities that are carried at fair value as at 31 December 2012 is as follows: Level 1 Level 2 Level 3 Total KD ′000 KD ′000 KD ′000 KD ′000 Financial assets (Restated) (Restated) Financial assets at fair value through profit or loss: Financial assets held for trading : Equity securities 2,318 - - 2,318 Debt securities 14,780 - - 14,780 Derivative financial instuments:

- Forward swaps / foreign exchange contracts - 1,048 - 1,048


Financial assets designated at fair value through profit or loss : Equity securities 4,503 - - 4,503 Managed funds - - 56,419 56,419 Financial assets available for sale : Equity securities 22,108 - 59,905 82,013 Debt securities 114,882 - 22,300 137,182 Financial liabilities Financial liabilites at fair value through profit or loss: Derivative financial instuments:

- Forward swaps/foreign exchange contracts - 1,627 - 1,627


The fair value of the above investment securities is categorised as per the policy on fair value measurement in Note 2. Movement in level 3 is mainly on account of purchases and change in fair value. During the year, an increase of KD 251 thousand (2012: increase KD 1,174 thousand) was recorded in the other comprehensive income representing change in fair value. There were no material transfers between the levels during the year. The impact on the consolidated statement of financial position or the consolidated statment of shareholders’ equity would be immaterial if the relevant risk variables used to fair value the unquoted securities were altered by 5%. 22. FIDUCIARY ASSETS The Group manages investment funds on behalf of customers with net asset value of KD 83,067 thousand (31 December 2012: KD 94,003 thousand).

90

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23. RISK MANAGEMENT INTRODUCTION Monitoring and controlling risks is primarily performed based on limits established by the Group. These limits reflect the business strategy and market environment of the Group as well as the level of risk that the Group is willing to accept, with additional emphasis on selected geographic and industrial sectors. In addition, the Group monitors and measures the overall risk bearing capacity in relation to the aggregate risk exposure across all risk types and activities. The operations of certain subsidiaries are also subject to regulatory requirements within the jurisdictions where it operates. Such regulations not only prescribe approval and monitoring of activities, but also impose certain restrictive provisions (e.g. capital adequacy) to minimise the risk of default and insolvency on the part of the banking and insurance companies to meet unforeseen liabilities as these arise. As part of its overall risk management, the Group uses derivatives and other instruments to manage exposures resulting from changes in interest rates and foreign currency transactions. The risk profile is assessed before entering into hedge transactions, which are authorised by the appropriate level of seniority within the Group. The Group classifies the risks faced as part of its day to day activities into certain categories of risks and accordingly specific responsibilities have been given to various officers for the identification, measurement, control and reporting of these identified families of risks. The categories of risks are:

A. Risks arising from financial instruments: i. Credit risk which includes default risk of clients and counterparties ii. Market risk which includes interest rate, foreign exchange and equity price risks and iii. Liquidity risk

B. Other risks i. Operational risk which includes risks due to operational failures

A. CREDIT RISK Credit risk is the risk that a counterparty will be unable to pay amounts in full when due. The Group structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or group of borrowers, and to geographical and industry segments. Such risks are monitored on a regular basis and are subject to regular review. Limits on the level of credit risk by product, industry sector and by country are approved by the Board or each subsidiary board. The exposure to any one borrower, including Banks and OFIs is further restricted by sub limits covering items on statement of financial position and commitments and contingent liabilities exposures and daily delivery risk limits in relation to trading items such as forward foreign exchange contracts. Actual exposures against limits are monitored daily. The Group has a well documented credit policy that complies with CBK regulations and defines the appetite of the Group for assumption of risks in its various business groups. Exposure to credit risk is managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and capital repayment obligations and by changing lending limits where appropriate. Exposure to credit risk is also managed in part by obtaining collateral and corporate and personal guarantees. Credit risk arising from derivative financial instruments is limited to those with positive fair values, recorded in the consolidated statement of financial position.

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23. RISK MANAGEMENT (continued) A. CREDIT RISK (continued) Maximum exposure to credit risk: The table below shows the maximum exposure to credit risk across financial assets before and after taking into consideration the effect of any collateral and other credit enhancements i.e. credit risk mitigation.

2013

KD 000’s 2012

KD 000’s Cash and cash equivalents 887,935 714,194 Treasury bills and bonds with CBK and others 583,647 483,588 Due from banks and other financial institutions 700,083 610,780 Loans and advances to customers 3,954,848 3,374,836 Investments securities 239,438 165,768 Other assets 59,529 47,569

───────── ───────── Total 6,425,480 5,396,735

───────── ───────── Commitments and contingent liabilities 1,503,537 1,379,573

───────── ───────── Maximum credit risk exposure before consideration of credit risk mitigation 7,929,017 6,776,308

═════════ ═════════ The exposures set above, are based on net carrying amounts as reported in the consolidated statement of financial position, except for commitments and contingent liabilities. Collateral and Credit risk mitigation techniques The amount, type and valuation of collateral are based on guidelines specified in the risk management framework. The main types of collaterals accepted include real estate and marketable securities. The revaluation and custody of collaterals are performed independent of the business units. The main credit risk mitigation techniques applied by the Group are based on eligible collaterals. The Group’s management monitors the market value of collateral, requests additional collateral in accordance with the underlying agreement, and monitors the market value of the collateral at regular intervals in line with regulatory guidelines. For further details regarding the Group’s use of credit risk mitigation techniques, and collateral policy, refer to Basel II – Pillar 3 Disclosures (Item 7) under the risk management section of the annual report. Credit risk concentration The top 10 largest exposures outstanding as a percentage of gross loans and advances to customers at 31 December 2013 is 18% (31 December 2012: 16%). The concentration across classes within loans and advances to customers, which form part of the significant portion of assets subject to credit risk, is given in note 5.

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23. RISK MANAGEMENT (continued) A. CREDIT RISK (continued) Credit risk concentration (continued) The Group’s financial assets and commitments and contingent liabilities, before taking into account any collateral held or credit enhancements can be analysed by the following geographic regions: 2013 2012

Assets

KD 000s

Commitments and contingent

liabilities KD 000s

Total KD 000s

Assets KD 000s

Commitments and contingent

liabilities KD 000s

Total KD 000s

Kuwait 3,080,854 690,427 3,771,281 2,795,689 630,025 3,425,714 Jordan 719,527 162,692 882,219 727,254 141,284 868,538 Algeria 427,327 273,144 700,471 326,310 235,952 562,262 Iraq 292,794 63,577 356,371 230,808 21,010 251,818 Tunisia 33,005 2,545 35,550 32,026 3,396 35,422 Turkey 966,336 232,121 1,198,457 731,884 240,950 972,834 Other middle east 477,816 4,913 482,729 286,815 23,441 310,256 Europe 222,993 21,905 244,898 176,052 27,677 203,729 Rest of the world 204,828 52,213 257,041 89,897 55,838 145,735

─────── ─────── ─────── ─────── ─────── ─────── 6,425,480 1,503,537 7,929,017 5,396,735 1,379,573 6,776,308 ═══════ ═══════ ═══════ ═══════ ═══════ ═══════

The Group’s financial assets and commitments and contingent liabilities, before taking into account any collateral held or credit enhancements can be analysed by the following industry sectors:

2013

KD 000’s 2012

KD 000’s

Industry sector Sovereign 1,208,430 955,358 Banking 1,271,936 1,048,470 Investment 104,451 205,717 Trade and commerce 1,032,803 799,005 Real estate 1,061,098 747,061 Personal 1,017,472 894,265 Manufacturing 729,813 470,332 Construction 589,751 540,843 Others 913,263 1,115,257

───────── ───────── 7,929,017 6,776,308 ═════════ ═════════

Credit quality per class of financial assets The credit quality of financial assets are summarised by reference to public ratings given to the clients/counterparties by recognised and approved External Credit Assessment Institutions (ECAIs) namely Moody’s, Standard and Poor’s and Fitch. Based on the rating systems as declared by the ECAIs, the ratings are classified into Investment Grade and Non-Investment Grade ratings. Those who are not rated by any of these three ECAIs are considered to be unrated. In order to ensure that the ratings are not considered selectively, if a current rating from one of these ECAIs available in respect of any client/counterparty, it is always taken into account and in such cases, the client/counterparty is not considered as unrated. For further details regarding the Group’s credit risk management policy please refer to Basel II – Pillar 3 Disclosures (Item 6-iii) under the risk management section of the annual report.

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23. RISK MANAGEMENT (continued) A. CREDIT RISK (continued) a) Financial assets neither past due nor impaired

2013 Rated Unrated Total

Investment

grade Non investment

grade KD 000’s KD 000’s KD 000’s KD 000’s Sovereigns 847,308 - 222,879 1,070,187 Banks and OFIs 816,725 70,705 335,764 1,223,194 Corporates - - 3,223,405 3,223,405 Retail - - 462,825 462,825 Other credit exposures 43,026 20,463 114,004 177,493 ─────── ─────── ─────── ───────

1,707,059 91,168 4,358,877 6,157,104 ═══════ ═══════ ═══════ ═══════

2012 Rated Unrated Total

Investment grade Non investment

grade KD 000’s KD 000’s KD 000’s KD 000’s Sovereigns 530,739 - 282,782 813,521 Banks and OFIs 608,414 54,813 331,349 994,576 Corporates - 3,823 2,612,938 2,616,761 Retail - 778 396,452 397,230 Other credit exposures 25,153 - 188,186 213,339 ─────── ─────── ─────── ───────

1,164,306 59,414 3,811,707 5,035,427 ═══════ ═══════ ═══════ ═══════ b) Financial assets past due but not impaired For credit risk related exposures, a past due exposure is considered to be one where the client or counterparty has failed to meet his contractual obligation to the Group towards payment of the interest or the principal or a part thereof on the date on which such payment is due.

2013 2012

1 to 45 days

45 to 90 days Total

1 to 45 days

45 to 90 days Total

KD000's KD 000's KD 000's KD 000's KD 000's KD 000's Banks and OFIs - - - - - - Corporates 121,941 4,659 126,600 118,195 28,523 146,718 Retail 11,703 9,479 21,182 12,456 12,211 24,667

─────── ─────── ─────── ─────── ─────── ─────── 133,644 14,138 147,782 130,651 40,734 171,385 ═══════ ═══════ ═══════ ═══════ ═══════ ═══════

Fair value of collateral held 116,392 5 116,397 51,529 1,549 53,078

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23. RISK MANAGEMENT (continued) A. CREDIT RISK (continued) Credit quality per class of financial assets (continued) c) Impaired financial assets The Group considers an asset to be impaired if the realisable value of the asset is less than the value at which it is carried in the books of the Group before it considers the necessity of making a specific provision for the same.

2013 2012

Total Provision

Fair value of collateral

held Total Provision

Fair value of collateral

held KD 000's KD 000's KD 000's KD 000's KD 000's KD 000's

Banks and OFIs 2,244 2,486 - 2,298 1,835 - Corporates 154,252 44,986 91,124 235,729 54,237 175,715 Retail 19,408 7,838 6,599 11,565 3,597 5,071

─────── ─────── ─────── ─────── ─────── ─────── 175,904 55,310 97,723 249,592 59,669 180,786 ═══════ ═══════ ═══════ ═══════ ═══════ ═══════

B. MARKET RISK Market risk is the risk that the value of an asset will fluctuate as a result of changes in market variables such as interest rates, foreign exchange rates, and equity prices, whether those changes are caused by factors specific to the individual investment or its issuer or factors affecting all financial assets traded in the market. Market risk is managed on the basis of pre-determined asset allocations across various asset categories, diversification of assets in terms of geographical distribution and industry concentration, a continuous appraisal of market conditions and trends and management’s estimate of long and short term changes in fair value. Interest rate risk Interest rate risk arises from the possibility that changes in interest rates will affect the fair value or cash flows of the financial instruments. The Group takes on exposure to the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flows. This arises as a result of mismatches or gaps in the amounts of assets and liabilities and off balance sheet instruments that mature or reprice in a given period. The Group manages this risk by matching the repricing of assets and liabilities through risk management strategies. The Group is exposed to interest rate risk on its interest bearing assets and liabilities (treasury bills and bonds with CBK and others, due from banks and OFIs, loans and advances to customers, due to banks, due to OFIs, deposits from customers and other borrowed funds). The table below summarises the effect on net interest income as a result of the changes in interest rate:

2013 2012 KD 000’s KD 000’s Increase in interest rate "Basis Points" 50 5,576 3,854 100 11,163 7,727

Decrease in interest rate “Basis Points” 50 (5,677) (2,920) 100 (11,364) (6,002)

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23. RISK MANAGEMENT (continued) B. MARKET RISK (continued) Currency risk Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Group takes on exposure to effects of fluctuations in the prevailing currency exchange rates on its financial position and cash flows. The Board of Directors sets limits on the level of exposure by currency and in total for both overnight and intra-day positions, which are monitored daily. The table below analyses the effect on profit and equity of an assumed 5% strengthening in value of the currency rate against the Kuwaiti Dinar from levels applicable at the year end, with all other variables held constant. A negative amount in the table reflects a potential net reduction in profit or equity, where as a positive amount reflects a net potential increase. 2013 2012 1Currency % Change in

currency rate

Effect on profit

KD 000’s

Effect on equity

KD 000’s

Effect on profit

KD 000’s

Effect on equity

KD 000’s

Jordanian Dinar +5 471 13,829 384 13,254 Algerian Dinar +5 460 3,899 339 3,397 Iraqi Dinar +5 169 4,283 123 3,322 Turkish Lira +5 (65) 4,354 - 5,389 US Dollar +5 1,624 2,311 673 2,010 Others +5 186 - 70 - Equity price risk Equity price risk is the risk that the fair values of equities will fluctuate as a result of changes in the level of equity indices or the value of individual share prices. Equity price risk arises from the change in fair values of equity investments. The Group manages this risk through diversification of investments in terms of geographical distribution and industry concentration. The majority of the Group’s quoted investments are listed on the regional Stock Exchanges. The Group conducts sensitivity analysis on regular intervals in order to assess the potential impact of any major changes in fair value of equity instruments. Based on the results of the analysis conducted there are no material implication over the Group’s profit or other comprehensive income for a 5% fluctuation in major stock exchanges. Prepayment risk Prepayment risk is the risk that the Group will incur a financial loss because its customers and counterparties repay or request repayment earlier than expected, such as fixed rate mortgages when interest rate fall. The fixed rate assets of the Group are not significant compared to the total assets. Moreover, other market conditions causing prepayment is not significant in the markets in which the Group operates. Therefore the Group considers the effect of prepayment on net interest income is not material after taking in to account the effect of any prepayment penalties.

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23. RISK MANAGEMENT (continued) C. LIQUIDITY RISK Liquidity risk is the risk that the Group will be unable to meet its liabilities when they fall due. The Group is exposed to daily calls on its available cash resources from overnight deposits, current accounts, maturing deposits, loan draw downs, guarantees. To limit this risk, the Group manages assets with liquidity in mind and monitors liquidity on a daily basis. The table below shows an analysis of financial liabilities and contingent liabilities and commitments based on the remaining undiscounted contractual maturities:

Up to 3 months

KD 000’s

3 – 6 months

KD 000’s

6 – 12 months

KD 000’s

More than 12 months KD 000’s

Total

KD 000’s 2013 Financial liabilities Due to banks 411,234 87,307 69,016 4,853 572,410 Due to other financial institutions 238,594 139,939 485,257 23,271 887,061 Deposits from customers 3,440,854 610,575 574,657 48,240 4,674,326 Other borrowed funds 2,221 5,296 9,732 323,307 340,556 Other liabilities* 86,422 15,685 17,839 98,244 218,190 ───────── ───────── ───────── ───────── ───────── 4,179,325 858,802 1,156,501 497,915 6,692,543 ═════════ ═════════ ═════════ ═════════ ═════════ Contingent liabilities and

commitments 704,639 309,211 218,942 270,745 1,503,537 ═════════ ═════════ ═════════ ═════════ ═════════

Up to 3 months

KD 000’s

3 – 6 months

KD 000’s

6 – 12 months

KD 000’s

More than 12 months KD 000’s

Total

KD 000’s 2012 Financial liabilities Due to banks 270,137 38,338 11,387 10,676 330,538 Due to other financial institutions 172,199 88,171 238,145 226,965 725,480 Deposits from customers 3,093,337 353,881 357,136 176,814 3,981,168 Other borrowed funds - 9,821 9,804 341,226 360,851 Other liabilities* 71,950 28,100 53,184 48,885 202,119 ───────── ───────── ───────── ───────── ───────── 3,607,623 518,311 669,656 804,566 5,600,156 ═════════ ═════════ ═════════ ═════════ ═════════ Contingent liabilities and

commitments 626,430 166,300 272,338 314,505 1,379,573 ═════════ ═════════ ═════════ ═════════ ═════════ * Other liabilities includes negative fair value of derivative financial liabilities (note 20).

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23. RISK MANAGEMENT (continued) C. LIQUIDITY RISK (continued) The table below summarises the maturity profile of the Group’s assets and liabilities. The maturities of assets and liabilities have been determined according to when they are expected to be recovered or settled. The maturity profile for financial assets at fair value through profit or loss and financial assets available for sale is determined based on management's estimate of liquidation of those financial assets. The actual maturities may differ from the maturities shown below since borrowers may have the right to prepay obligations with or without prepayment penalties.

Up to 3 months KD 000s

3 – 6 months KD 000s

6 – 12 months KD 000s

More than 12 months KD 000s

Total

KD 000s 2013 ASSETS Cash and cash equivalents 1,004,290 - - - 1,004,290 Treasury bills and bonds with CBK and others 256,989 127,993 83,663 115,002 583,647 Due from banks and other financial institutions 338,659 148,831 170,351 42,242 700,083 Loans and advances to customers 1,436,956 333,933 367,066 1,816,893 3,954,848 Investment securities 44,721 3,309 41,159 332,213 421,402 Other assets 77,650 4,463 6,105 149,920 238,138 Property and equipment - - - 81,378 81,378 Intangible assets - - - 170,965 170,965 ──────── ──────── ──────── ──────── ──────── Total assets 3,159,265 618,529 668,344 2,708,613 7,154,751

════════ ════════ ════════ ════════ ════════ LIABILITIES AND EQUITY Due to banks 407,988 87,038 68,728 4,807 568,561 Due to other financial institutions 238,453 139,658 479,574 22,807 880,492 Deposits from customers 3,424,601 603,080 567,779 44,624 4,640,084 Other borrowed funds - 2,415 2,415 222,767 227,597 Other liabilities 86,422 15,685 17,839 98,244 218,190 Equity - - - 619,827 619,827 ──────── ──────── ──────── ──────── ──────── Total liabilities and equity 4,157,464 847,876 1,136,335 1,013,076 7,154,751

════════ ════════ ════════ ════════ ════════ Net liquidity gap (998,199) (229,347) (467,991) 1,695,537 - ════════ ════════ ════════ ════════ ════════

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23. RISK MANAGEMENT (continued) C. LIQUIDITY RISK (continued)

Up to 3 months

KD 000s

3 – 6 months

KD 000s

6 – 12 months

KD 000s

More than 12 months KD 000s

Total

KD 000s 2012 ASSETS Cash and cash equivalents 787,468 - - - 787,468 Treasury bills and bonds with CBK and others 241,521 124,749 79,793 37,525 483,588 Due from banks and other financial institutions 370,526 92,185 59,911 88,158 610,780 Loans and advances to customers 1,164,216 388,634 339,256 1,482,730 3,374,836 Investment securities 120,998 3,406 3,978 182,639 311,021 Other assets 70,714 27,229 2,111 57,076 157,130 Property and equipment - - - 69,130 69,130 Intangible assets - - - 178,985 178,985 ──────── ──────── ──────── ──────── ──────── Total assets 2,755,443 636,203 485,049 2,096,243 5,972,938

════════ ════════ ════════ ════════ ════════ LIABILITIES AND EQUITY Due to banks 253,334 37,795 10,743 9,762 311,634 Due to other financial institutions 172,121 87,631 234,236 219,265 713,253 Deposits from customers 3,029,964 347,753 345,959 171,440 3,895,116 Other borrowed funds - 2,338 2,338 226,309 230,985 Other liabilities 71,950 28,100 53,184 48,885 202,119 Equity - - - 619,831 619,831 ──────── ──────── ──────── ──────── ──────── Total liabilities and equity 3,527,369 503,617 646,460 1,295,492 5,972,938

════════ ════════ ════════ ════════ ════════ Net liquidity gap (771,926) 132,586 (161,411) 800,751 - ════════ ════════ ════════ ════════ ════════

D. OPERATIONAL RISK Operational risk is the risk of loss arising from the failures in operational process, people and system that supports operational processes. The Group has a set of policies and procedures, which are approved by the Board of Directors and are applied to identify, assess and supervise operational risk in addition to other types of risks relating to the banking and financial activities of the Group. Operational risk is managed by Risk management. Risk management ensures compliance with policies and procedures to identify, assess, supervise and monitor operational risk as part of overall Global risk management. 24. CAPITAL MANAGEMENT The primary objectives of the Group's capital management policy are to ensure that the group complies with regulatory capital requirements and that the group maintains strong credit ratings and health capital ratios in order to support its business and maximize shareholder value. Capital adequacy and the use of regulatory capital are monitored regularly by the Group’s management and are governed by guidelines of Basel Committee on Banking Supervision as adopted by the CBK.

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24. CAPITAL MANAGEMENT (continued) The Group’s regulatory capital and capital adequacy ratios are shown below: 2013 2012 KD 000s KD 000s Risk weighted assets 4,806,916 4,003,762

═════════ ═════════ Capital required 576,830 480,451

═════════ ═════════

Capital available Tier 1 capital 474,365 479,986 Tier 2 capital 266,300 261,894

───────── ───────── Total capital 740,665 741,880

═════════ ═════════ Tier 1 capital adequacy ratio 9.9% 12.0% Total capital adequacy ratio 15.4% 18.5% Regulatory capital consists of Tier 1 capital, which comprises share capital, disclosed reserves and non-controlling interests less treasury shares and goodwill. The other component of regulatory capital is Tier 2 capital, which includes subordinated long term debt, available for sale reserve and general provisions. Certain adjustments are made to regulatory capital as per CBK. The disclosures relating to the Capital Adequacy Regulations issued by CBK as stipulated in CBK Circular number 2/BS/184/2005 dated 21 December 2005, are included under the ‘Basel II – Pillar 3 discloures’ section of the annual report.

100

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Burgan Bank S.A.KP.O. Box 5389 Safat 12170State of KuwaitTelephone: +965 22988000Fax: +965 22988419www.burgan.com

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LNS 187 C, Copyright ©, The al-Sabah Collection, Dar al-Athar al-Islamiyyah, Kuwait

This year, the annual reports of KIPCO Group companies each feature a key ceramic artifact from The al-Sabah Art Collection – one of the world’s finest collections of Islamic art. These images are reproduced with the kind permission of the Dar al-Athar al-Islamiyyah.

Shareholders attending our General Assembly meeting will be provided with a draft printed copy of the Financial Statements for their approval. Shareholders can request a printed copy of the Financial Statements to be sent to them by courier seven days before the advertised date of the General Assembly; please call +965 2298 8000 to arrange this.

Shareholders can request a copy of the Financial Statements to be sent to them by email seven days before the advertised date of the General Assembly. Please send an email request to [email protected] to arrange this.

Shareholders can download a PDF copy of the Financial Statements seven days before the advertised date of the General Assembly from our company website – www.burgan.com

How to obtain our 2013 Financial Statements:

For further information on our 2013 Financial Statements or for extra copies of this review, please telephone +965 2298 8000

P.O. Box 5389, Safat 12170, Kuwait, Tel: +965 2298 8000 Fax: +965 2298 8419www.burgan.com

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