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Annual Report and Accounts 2010
European Islamic Investment Bank PlcAnnual Report and Accounts 2010
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InthenameofAllah,theMostGracious,theMostMerciful
European Islamic Investment Bank PlcAnnual Report and Accounts 2010
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European Islamic Investment Bank PlcAnnual Report and Accounts 2010
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3 Highlights 4 Chairman’sStatement 6 Directors 8 OperatingandFinancialReview 10 ReportoftheDirectors 13 CorporateGovernance 16 ReportoftheSharia’aSupervisoryBoard 17 StatementofDirectors’Responsibilities 18 IndependentAuditor’sReport
TheFinancialStatements 20 ConsolidatedStatementofComprehensiveIncome 21 ConsolidatedStatementofFinancialPosition 22 ConsolidatedStatementofChangesinEquity 24 ConsolidatedStatementofCashFlows 25 CompanyStatementofFinancialPosition 26 CompanyStatementofChangesinEquity 28 CompanyStatementofCashFlows 29 NotestotheFinancialStatements 80 BankInformation
Contents
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• Total Comprehensive Income of £7.5m (2009: loss of £18.9m)
• Total Equity increase to £147.1m (2009: £141.3m)
• Assets increase by 9% to £181.5m (2009: £167.0m)
• Revaluation gain on oil and gas assets of £20.8m before tax
• New CEO, Mr. Subhi Benkhadra appointed in March 2010
• Revised strategy focusing on three core business lines in Islamic Markets: - Banking, Investment Management and Financial Services
• Advisory agreements signed with key investment advisers covering Arab and ASEAN markets
• Quoted Equity Fund launched under new ‘Turath’ brand
• Strategic stake acquired in a holding company specialising in investments in technology, media and telecommunications in the Middle East and North Africa
• Strong capital base and liquidity, regulatory ratios of 100% and 70% compared to FSA minima of 8% and -5% respectively
Highlights
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IampleasedtopresenttoourShareholders,theEuropeanIslamicInvestmentBankplc’s(‘EIIB’or‘Bank’)resultsfor2010.
ThisismyfirststatementfollowingmyappointmentasChairmanofEIIBon10thFebruary2011.TheBoardofEIIBhasawealthoftalentandexperienceandIamproudtohavetheopportunitytoserveastheChairmanoftheBoard.
OnbehalfoftheDirectors,EmployeesandShareholdersofEIIB,IwouldliketoextendmyverysincerethanksandbestwishestoMr.AdnanYousif,whoresignedfromtheBoardofDirectorsandstooddownasChairmaninFebruary2011.Mr.YousifwasinstrumentalinestablishingEIIBasthefirstIslamicinvestmentbankintheUK,andsteereditthroughitsformativeyearsandtheglobaleconomiccrisisof2008/9.HeleavesbehindanorganisationwhichhasreturnedtogeneratingvalueforShareholders.
Duringthepastyear,confidencebegantoreturntothefinancialmarkets,withequitymarketsrecoveringstronglyfromthelowspostedduringthedepthsofthecreditcrunchandliquiditystartingtobecomemorewidelyavailable.2010wasthereforeanappropriatetimefortherelaunchofEIIB.
AsShareholderswillbepainfullyaware,EIIB’sfoundingstrategyhasshownitselftobeover-optimisticandincompatiblewiththedramaticallychangedbusinessenvironmentresultingfromtheglobalrecession.Asnotedintheinterimreport,followingadetailedstrategicreview,theDirectorsdeterminedthatEIIBwouldinfuturefocusonthreecorebusinesslineswithinIslamicmarkets,namelyInvestmentManagement,BankingandFinancialServices.TherelaunchwascementedbytheintroductionofMr.SubhiBenkhadraastheBank’snewChiefExecutiveOfficerinMarch2010.SubhibringswithhimawealthofexperienceandhasthefullconfidenceoftheBoardandtheManagement.
InthisprevailingcontextIamparticularly
TotheShareholdersoftheEuropeanIslamicInvestmentBankPlc
Chairman’sStatement
delightedtoreportthatin2010EIIBhasonceagainstartedtoproducepositivevalueforShareholders,generatingatotalcomprehensiveincomeof£7.5m.ThisoutcomereflectsthesuccessfuldevelopmentofinvestmentsundertakenbytheBank,aswellastheearlysignsofsuccessfromtheBank’snewstrategywhichisbeingcurrentlyimplementedbythenewCEOandhisteam.
SignificantprogresshasbeenmadewiththedevelopmentoftheInvestmentManagementbusiness;AdvisoryagreementshavebeensignedwithEsteradInvestmentCompanyandNavisFundManagersLimitedtoprovideexpertinvestmentadvicecoveringArabandSouthEastAsianmarketsrespectively.InDecemberEIIBlaunchedtheTurathQuotedEquityFund(TQEF),thefirstfundlaunchedunderEIIB’sTurathbrand.TheFundwilllooktogeneratecapitalappreciationthroughinvestingprimarilyinquotedequitiesinIslamicMarkets.OtherdevelopmentsduringtheyearincludedtheBanktakingastrategicstakeinAcceleratorTechnologyHoldings,aninvestmentholdingcompanybasedinJordanspecialisinginregionaltechnology,mediaandtelecoms.InadditiontheBankwasabletoopportunisticallyacquireasecondaryinvestmentfromadefaultedinvestorintheNavisIslamicInvestmentFund(Asia)LP,generatingarevaluationgainbytheyearendof£1.1m.
TheBank’sPrivateEquityinvestmentsinTriTechandDiamondCorphavebeguntodemonstratepositiveresults.TriTech,theoilandgasventurehas,withitspartners,undertakensubstantialexplorationandproductionactivityduringthelatterpartof2010.TheresultstodatehavebeenverypositiveandprovenreservesofoilandgasdiscoveredwithinthelandcontrolledbyTriTecharesignificant.Followingtheresultsofanindependentvaluationundertakenattheyear-end,theDirectorshavedeterminedthatEIIB’soilandgasassetsshouldberevaluedto£26.4m,generatingagainof£20.8mbeforethedeferredtaxliabilityof£7.3m,whichis
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ShabirRandereeChairman
acquisitionsarebeingactivelyconsideredandIwouldanticipatefurtherdevelopmentsduring2011.
Asnotedintheinterimreport,theDirectorsdeterminedthatEIIBshouldexititsholdingintheSaadGoldenBeltSukuk;thisgeneratedaonetimegainof£1.0m.
EIIBhasalwaysmaintainedastrongcapitalbase(100%versusFSAregulatoryminimumof8%asatDecember2010),andahighlyliquidbalancesheet(+70%versusregulatoryminimumof-5%asatDecember2010).Withthedeploymentofcapitalunderthenewstrategy,regulatorycapitalandliquidityratioswillbemanageddowninatightlycontrolledmannertomoreefficientlevels.
IamtrulyoptimisticaboutEIIB’sfutureprospects,ourmanagementcontinuetoproactivelyimplementtheBank’snewstrategyandmovedecisivelytotakeadvantageofopportunitieswhichariseasthefalloutfromtheeconomiccrisiscontinuestoplayout.Theyearaheadwillbeonefullofchallengeandopportunity,however,EIIBisnowfarbetterpositionedtodeliverthereturnsandgrowththatourShareholdersexpect.
IwouldliketosincerelyconveymygratitudetoallourShareholdersfortheircontinuedsupportandtoourManagementandtheBoardfortheirperseveranceinrestoringtheBanktohealth.WiththegraceoftheAlmighty,Ilookforwardtoasuccessfulyearahead.
recognisedinOtherComprehensiveIncome.DiamondCorp,theemergingdiamondminingcompanyhasmadegoodprogressduring2010,focusingprimarilyondevelopmentworkatthecompany’sprincipalasset,theLacemineinSouthAfrica.ItisanticipatedthatDiamondCorpwillextractabulksamplefromtheLaceminebyMay2011and,assumingthatthetestresultsfromthebulksamplearefavourable,thiswillbeasignificantstepforwardinbringingtheLaceminetocommercialproduction.EIIBparticipatedinfurthercapitalraisesbyDiamondCorpin2010tofundtheongoingdevelopmentwork.EIIB’sshareofthecapitalraisedwas£2.8m.EIIB’sinvestmentwasrevaluedtotheequityissuepriceof8.5pencepershare,generatingarevaluationgainof£0.6m.
Onthebankingfront,yieldspersistedatlowlevelsduring2010,andthevolumeofSharia’acomplianttransactionswassignificantlydownonpreviousyears.InthismutedenvironmentEIIBcontinuedtobuildrelationshipsinEurope,theMiddleEastandAsia,whilstmanagingtheBank’scurrencyexposureandexcessliquidityprudently.
TheFinancialServicesbusinesslineisintheearlystagesofitsdevelopment.Theopportunityforcorporatefinance,custody,trustandfundadministration,andbusinessadvisoryactivitieswithintheIslamicmarketissignificantandlargelyun-serviced.Anumberofproductsandpotential
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Shabir Randeree*(2),(3),(4).ChairmanoftheBoardofEIIBandChairmanoftheBoardRiskCommittee.HeisChairmanofDCDLondon&Mutual,afamilyinvestmentofficeandholdsanumberofotherdirectorships,includingthatofDeputyChairmanofAlbarakaBank,SouthAfrica.HeholdsaBA(Hons)inAccountingandFinanceandanMBA.
Aabed Al Zeera*(2),(4).DeputyChairmanoftheBoardofEIIB.AprominentBahrainibanker,hehasalmost30yearsofinternationalbankingexperiencewithmajorfinancialinstitutionsintheKingdomofBahrainandtheUnitedArabEmirates,includingAmericanExpressBankingCorporation,ArabBankingCorporation(ABC),StandardCharteredBankandFirstIslamicInvestmentBank(nowArcapita).Mr.AlZeerawasalsoinstrumentalinsettingupABC’sRepresentativeOfficeinAbuDhabiin1996,whereheservedasVicePresidentandChiefRepresentative.HeiscurrentlyaBoardMemberandtheChiefExecutiveOfficerofInternationalInvestmentBank,anIslamicinvestmentbankestablishedintheKingdomofBahrain,inwhichhewasafoundingshareholderandthekeypromoteraswell.
Salman Abbasi*(3).ChairmanoftheNominationCommittee.JoinedInvestcorpBahrainasamemberoftheManagementCommitteeinearly1988andwasGeneralManagerofInvestcorpBahrainfromthenuntil2004whenheretired.HewasassociatedwithChaseManhattanBankfrom1967servingfor20yearsinavarietyofpositionsbothattheheadofficeinNewYorkandoverseas.InhislastpositionpriortojoiningInvestcorphewasVicePresidentandChiefExecutiveresponsibleformanagingallChasebusinessinAfricaandtheMiddleEast.HealsoservedconcurrentlyasaDirectorontheboardsofSaudiInvestmentBankandChaseBankCameroon.Histotalbankingcareerexceeds40years.
Yusef Abu Khadra* (1),(2),(4).ChairmanoftheRemunerationCommittee.FormerlyaMemberofthe
Directors Non-ExecutiveDirectors
ManagementCommitteeofInvestcorpBahrainandlatterlyanExecutiveDirectorofInvestcorpSecuritiesinLondonuntilhisretirementin2005.HehasalsoservedwithMorganStanleyinLondonandNewYork,andhasheldanumberofpositionsinfinancialservicesbasedintheMiddleEastandSwitzerland.Hisbankingexperiencespansnearly36years.CurrentlyheistrusteeoftheAmericanUniversityofBeirutandadirectoroftheCouncilofBritishArabUnderstanding.HeholdsaMastersDegreeinFinancefromMichiganStateUniversity.
Mohammed Al Sarhan*(3),(4).SeniorIndependentDirectorofEIIB.VicePresidentandChiefOperatingOfficerofAlFaisaliahGroup,KingdomofSaudiArabiasince2001.PreviouslyhewasManagingDirectorofAlSafiDanoneCo.andVicePresidentofSamarec.HeisViceChairmanoftheNationalShippingCompanyofSaudiArabia;BoardMemberofSaudiArabianPublicTransportCompany;BoardMemberofAlSafiDanoneCo.;BoardMemberofSaudiFreshDairyBoardandPresidentoftheAlSafiClubforFriendsoftheEnvironment.Mr.AlSarhanholdsaB.Sc(Mathematics)fromOregonStateUniversity,USA.
Yaser Alsharifi(1),(4).ManagingDirector,Investments,atAlRajhiHoldingsandwaspreviouslyapartneratErnst&Young,Bahrain.HeholdsaBachelorofBusinessAdministration(Accounting),CumLaudefromtheUniversityofMassachusettsatAmherst,USAandanAssociateAccountingDiplomafromtheUniversityofBahrain.
George Morton*(1),(4).ChairmanoftheAuditCommittee.Hehasspentover40yearsingovernmentserviceandinternationalbanking,principallyinEastAsiaandtheArabianGulf,includingseniorpositionswithArabBankingCorporation,NationalBankofBahrainandGulfInternationalBank.HeholdsanMAinEastAsianHistoryfromtheUniversityofTorontoandisalsocurrentlyaLayMemberoftheGoverningCounciloftheUniversityofBristol.
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Subhi BenkhadraChiefExecutiveOfficerofEIIB.HewaspreviouslyChiefExecutiveOfficerofEsteradInvestmentCompany;ChiefExecutiveOfficerandManagingDirectorofInvestmentTrustLimited;DeputyManagingDirectorofPrimecorpInvestmentManagementLimited;andHeadofArabCapitalMarketsatUnitedBankofKuwait.HeholdsaB.Sc(Engineering)fromtheUniversityofBath,UKandanMBAfromCityUniversityBusinessSchool,UK.
Keith McLeodDeputyChiefExecutiveOfficerandFinanceDirectorofEIIB.Hestartedhiscareerat,andqualifiedasacharteredaccountantwith,PriceWaterhouse.BeforejoiningEIIB,hewasExecutiveDirector,HeadofFundServicesandLogisticsReportingatUBSGlobalAssetManagement.HehasheldseniorpositionsatSchroders,CreditSuisseFirstBoston,MorganStanleyandHSBC.HeholdsaB.Sc(Economics)fromtheLondonSchoolofEconomics,UK.
(1) MemberoftheAuditCommittee(2) MemberoftheRemunerationCommittee(3) MemberoftheNominationCommittee(4) MemberoftheBoardRiskCommittee* IndependentDirector
ExecutiveDirectors
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IntroductionTheDirectorspresenttheOperatingandFinancialReviewfor2010.HavingfollowedtheframeworksetoutintheAccountingStandardsBoard’sReportingStatement:OperatingandFinancialReviewasaguidetobestpractice,theDirectorsbelievetheyhavedischargedtheirresponsibilitiesunderSection417oftheCompaniesAct2006toprovideabalancedandcomprehensivereviewofthedevelopmentandperformanceofthebusiness.
EIIB’s Objectives and Market EnvironmentEIIBisauthorisedbytheFinancialServicesAuthority(FSA)andislistedintheUKontheAlternativeInvestmentMarketwithintheLondonStockExchange.
TheBankbridgesthegapbetweenthefinancialmarketsoftheIslamicworldandthoseofWesternandOECDterritories.ItdeliversproductsandservicesacrossassetclassestotheIslamicwholesale,institutional,andhighnetworthindividualmarkets.TheBank’scompetitivepositioningissignificantlyenhancedbyitsbaseinthepre-eminentglobalfinancialcentre,London.
ThekeyprinciplesofIslamicbanking,derivedfromtheQuran,arebasedontheavoidanceof:
• Interest • Uncertainty• Speculation• Unjustenrichmentorunfairexploitation
TheBank’sSharia’aSupervisoryBoard(SSB),comprisingeminentIslamicscholars,istaskedwithensuringthatallproductsandservicesarestructuredtoreflecttheseprinciples.
Business ObjectivesThecurrentoperationsoftheBankareorganisedintothreebusinesslines:
OperatingandFinancialReviewBankingEIIB’sbankingactivitiesencompassesdeposittaking,provisionoffinancing,treasuryservices,structuredproducts,andtradinginIslamicandSharia’acompliantsecurities.
InvestmentManagementEIIBprovidesInvestmentManagementexpertisecoveringquotedequities,privateequityandrealestate.
FinancialServices FinancialServicesincorporatescorporatefinance,custody,trustandfundadministration,aswellasbusinessadvisoryactivities.
Business Strategy and ResultsFollowingtheturmoilandchallengesof2009,2010provedtobeayearwhentheglobalrecoverybegantotakehold.
AttheconsolidatedlevelEIIB’sresultsreflectacomprehensiveincomeof£7.5maftertax.TheresultreflectstheearlystagebenefitsofEIIB’srevisedstrategy,andtheexpectedturnaroundoftheDiamondCorpandTriTechinvestments.
Thenewstrategy,focusingonBanking,InvestmentManagement,andFinancialServicesinIslamicmarketshasdrivenEIIB’soperationsandinvestmentdecisionsduring2010.ThepreviouslyhighlevelsofliquidityarebeingdeployedinacontrolledmannerastheBankmovestoamoreefficientbalancesheetstructure.
DiamondCorpandTriTechbothreflectEIIB’slongtermvaluedrivenapproachtoequityinvestments.DiamondCorp,adiamondproductioncompanyoperatinginSouthAfricahasrecoveredfromtheseverefinancialstressesof2009,andisnowclosetoproducinganindustrialsampleofKimberlite.DiamondCorpundertookasuccessfulcapitalraiseatapriceof8.5pinDecember2010.
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TriTech,EIIB’soilandgasexplorationventure,hasmadesignificantprogressduring2010,basedontheproductionandreservedataobtainedtodate;thevalueattributedtoTriTechreserveassetshasincreasedsignificantly.
People AsignificantdifferentiatingfactorforourbusinesshasbeenourabilitytoattractqualitystafffromtheLondonmarket.TheDirectorsbelievethatEIIBhasacompetitiveremunerationstructure,whichenablestheBanktoretainandattractstaffofthehighestcalibre,thishasbeenenhancedbytheintroductionofashareincentiveschemeandanincentiveschemelinkedtothelongtermprofitabilityoftheBank.
OperationalTheBankhasbuiltanoperationalinfrastructurethatisrobustandscalable.TheDirectorsareconfidentthatthecontrolsaroundthesesystemsandprocessesareeffectiveinprotectingandsafeguardingtheBank’sassets.EIIB’sinternalauditfunction,underthedirectionoftheBoard’sAuditCommittee,isresponsibleforworkingwithmanagementtoidentifyandquantifyrisk,provideindependentappraisalsofsystemsofinternalcontrol,addvaluetobusinessinitiativesandsupportdevelopmentofasoundcontrolculturethroughouttheBank.
RisksEIIBisexposedtomarketriskinrelationtoitsassetsandliabilities,creditriskfromtransactionswiththirdparties,particularlymoneymarkettransactions,liquidityriskfromliquiditymismatchesandoperationalrisk.
TheBank’smeasuredapproachtoriskisdocumentedinvariousriskpolicies.Underthesepoliciesriskismonitoredonadailybasis.FurtherdetailsarereportedinNote34.
Key Performance IndicatorsTheBankdoesnotconsideritmeaningfulatthispointtodisclosenumericaltargetsandperformanceindicators.
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EIIB’sprimaryfocusisonsourcing,structuringanddistributing
investmentsinIslamicmarkets.
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TheDirectorsofEuropeanIslamicInvestmentBankplc(registrationnumber5328847)havepleasureinpresentingtheirannualreport,togetherwiththeauditedfinancialstatements,fortheyearended31December2010.
Principal ActivitiesEuropeanIslamicInvestmentBankplcisaSharia’acompliantinvestmentbankauthorisedbytheUKFinancialServicesAuthority.HeadquarteredinLondon,withaMiddleEastregionalofficeinBahrain,EIIB’sprimaryfocusisonsourcing,structuringanddistributinginvestmentsinIslamicmarkets.EIIBinvestsinarangeofindustriesacrosstheIslamicworld-providingfinance,equityandhybridcapitalinvestmentstoclientsrangingfromlargecorporationstosmallerentrepreneur-drivenbusinesses.
EIIB’smissionistoachieveexcellenceintheprovisionofinvestmentbankingproductsandservicesinaccordancewiththeprinciplesofSharia’a.Theactivitiesofthebankinclude;Bankingservicesencompassingdeposittaking,provisionoffinancing,treasuryservices,structuredproductsandtradinginIslamicandSharia’acompliantsecurities;Investmentmanagementencompassingquotedequities,privateequityandrealestate;andFinancialservicesencompassingcorporatefinance,custody,trustandfundadministrationactivitiesandbusinessadvisoryservices.
Financial ResultsThefinancialstatementsfortheyearended31December2010areshownonpages20to79.Thecomprehensiveincomefortheyearaftertaxationamountsto£7.5m(2010lossaftertax£5.9m)(2009:comprehensiveloss£18.9mandlossaftertax£22.2m).
DividendTheCompanyhasnoplanstodeclareadividend.
DirectorsTheDirectorsservingatthedateofthisreportandduringtheyearareshownonpages6and7.
On15March2010 SubhiBenkhadra,previouslyaNon-ExecutiveDirectoroftheCompany,wasappointedtheCompany’snewChiefExecutiveOfficer.UponappointmentofthenewChiefExecutiveOfficer,KeithMcLeodsteppeddownasInterimChiefExecutiveOfficerandrevertedtohisroleasFinanceDirector.Inaddition,hewasappointedDeputyChiefExecutiveOfficer.
On28April2010 ZaherMohammadAl-AjjawiresignedasaNon-ExecutiveDirectorandmemberoftheAuditCommittee.
On27July2010 YaserAlsharifiwasappointedasaNon-ExecutiveDirectorandmemberoftheAuditCommittee.Inaddition,on10February2011,hewasappointedamemberoftheBoardRiskCommittee.
On2February2011 AdnanAhmedYousifresignedasaNon-ExecutiveDirectorandChairmanoftheBoard.
On10February2011 ShabirRandereewasappointedChairmanandAabedAlZeerawasappointedDeputyChairmanoftheBoard.
ReportoftheDirectors
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Name Class of share Interest at end of year Interest at start of year
Adnan Ahmed Yousif Ordinary 1p 2,000,000 0.11% 2,000,000 0.11%
George Morton Ordinary 1p 1,000,000 0.06% 1,000,000 0.06%
Shabir Randeree Ordinary 1p 1,524,783 0.09% 1,524,783 0.09%
Mohammed Al Sarhan Ordinary 1p 3,049,567 0.17% 3,049,567 0.17%
NoneoftheotherDirectorswhoheldofficeattheendofthefinancialyearhadanyotherdisclosableinterestinthesharesoftheBankexceptfortheinterestinESIP2010schemebythetwoExecutiveDirectorsasdetailedinNote8.
AccordingtotheregisterofDirectors’interests,norightstosubscribeforsharesinordebenturesoftheBankweregrantedtoanyoftheDirectorsortheirimmediatefamilies,orexercisedbythem,duringthefinancialyear.
Sharia’a Supervisory Board membersTheSharia’aSupervisoryBoard(SSB)membersareasfollows:
• Dr.AbdulSattarAbuGhuddah-Chairman • SheikhNizamYacouby-DeputyChairman• Dr.AbdulLatifM.AlMahmood
ZakahZakahisanannualamounttobepaidbyMuslimstocharityoutoftheirsavings.TheDirectorscalculatethatthezakahcontributionpayablebyshareholdersontheirshareoftheBank’searningsis0.21ppershareor£2.10perthousandsharesheldbasedonthenetassetsmethodasdetailedintheAccounting,Auditingand
GovernanceStandards2004-5oftheAccountingandAuditingOrganisationforIslamicFinancialInstitutions.
Political Contributions and Charitable Donations TheBankmadenopoliticalcontributionsorcharitabledonationsduringtheyear.
Policy and Practice on Payment of Creditors TheBankfollows‘TheBetterPaymentPracticeCode’publishedbytheDepartmentofTradeandIndustry,regardingthemakingofpaymentstosuppliers.
TheBank’spolicyistoagreetermsofpaymentwithsuppliersandthesenormallyprovideforsettlementwithin30daysafterthedateoftheinvoice,exceptwhereotherarrangementshavebeennegotiated.ItisthepolicyoftheBanktoabidebytheagreedtermsofpayment,providedthesupplierperformsaccordingtothetermsofthecontract.
Events since the Balance Sheet DateTheDirectorsconfirmtherearenosignificanteventsarisingsincethebalancesheetdatethatshouldbereportedtoshareholders.
Directors’ Interests
TheDirectorswhoheldofficeattheendofthefinancialyearhadthefollowingbeneficialinterestsintheordinarysharesoftheBankaccordingtotheregisterofDirectors’interests.Thetableshowsthenumberofsharesheldandasapercentageoftotalsharesinissueatthattime:
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Going Concern InapprovingthefinancialstatementstheDirectorshavereviewedthecurrentandpotentialfuturebusinessactivitiesandfinancialpositionoftheBank,includinganassessmentofthecapitaladequacyandliquidityforecasts.BaseduponthistheyaresatisfiedthattheBankhasadequateresourcestocontinueinbusinessfortheforeseeablefuture.ForthisreasontheDirectorscontinuetoadoptthegoingconcernbasisinpreparingthefinancialstatements.
AuditorsResolutionsconcerningtheappointmentofauditorsandauthorisingtheDirectorstosettheirremunerationwillbeproposedattheAnnualGeneralMeeting.
Directors’ Statement as to Disclosure of Information to AuditorsTheDirectorswhoweremembersoftheBoardatthetimeofapprovingtheDirectors’reportarelistedonpages6and7.HavingmadeenquiriesoffellowDirectorsandoftheBank’sauditors,eachoftheDirectorsconfirmsthat:
• tothebestofeachDirector’sknowledgeandbelief,thereisnoinformationrelevanttothe preparationofthereportofwhichtheBank’sauditorsareunaware;and
• eachDirectorhastakenallthestepsaDirectormightreasonablybeexpectedtohavetakento beawareofrelevantauditinformationandtoestablishthattheBank’sauditorsareawareof thatinformation.
ByorderoftheBoard
MohammedAbdulMohaiminChowdhuryCompanySecretary
7April2011
RegisteredOffice: MiltonGate60ChiswellStreetLondonEC1Y4SA
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Compliance with the Combined Code TheBoardconsidersthatgoodcorporategovernanceiscentraltoachievingtheBank’sobjectivesandhasappliedtheseprinciplesindrawinguptheBank’sriskmanagementframeworktakingintoconsiderationTheCombinedCodeonCorporateGovernanceJune2008publishedbytheFinancialReportingCouncil(‘TheCombinedCode’).TheBankalsointendstoapplytheprinciplesoftheUKCorporateGovernanceCodeJune2010,whichreplacestheCombinedCodeinrespectofaccountingperiodsbeginningonorafter29June2010.
The Board and its CommitteesTheBankisledbyaBoardcomprisingNon-ExecutiveandExecutiveDirectorswithwideexperienceofIslamicandconventionalbanking.TheappointmentofDirectorsisconsideredbytheNominationCommitteeandthentheBoard.FollowingtheprovisionsintheArticlesofAssociation,allNon-ExecutiveDirectorsmuststandforre-electionbytheshareholdersatthefirstAnnualGeneralMeetingfollowingtheirappointmentandfollowingthatmeetingmuststandforre-electionbytheshareholders,atleasteverythreeyears.ExecutiveDirectorsnormallyretireatage65,asrequiredbytheirserviceagreements.Non-ExecutiveDirectorsareappointedforthree-yearrenewableterms,whichmaybeterminatedbygivingthreemonthsnotice.
TheBoardisrequiredtomeetatleastfourtimesayear;in2010therewerefiveBoardmeetings.TheBoardhasaprogrammedesignedtoenabletheDirectorstoreviewcorporatestrategyandtheoperationsandresultsofthebusinessand
CorporateGovernance
todischargetheirdutieswithinaframeworkofprudentandeffectivecontrolsrelatingtotheassessmentandmanagementofrisk.
ThemattersspecificallyreferredtotheBoardfordecisionincludetheapprovaloftheannualreportandfinancialstatements;thepaymentofdividends;thelong-termobjectivesoftheBank;thestrategiesnecessarytoachievetheseobjectives;theBank’sbudgetsandplans;significantcreditexposures;significantcapitalexpenditureitems;significantinvestmentsanddisposals;theorganisationalstructureoftheBank;thearrangementsforensuringthattheBankmanagesriskeffectively;anysignificantchangeinaccountingpoliciesorpractices;theappointmentoftheBank’smainprofessionaladvisers;andtheappointmentofseniorexecutiveswithintheorganisation.
TheBoardhasdelegatedtotheCommitteesoftheBankthepowertomakedecisionsonoperationalmatters,includingthoserelatingtocredit,liquidity,operationalandmarketrisk,withinanagreedframework.
AllDirectorshaveaccesstotheservicesoftheCompanySecretary,andindependentprofessionaladviceisavailabletotheDirectorsattheBank’sexpense,wheretheyjudgeitnecessarytodischargetheirdutiesasDirectors.
TheBoardreviewsandapprovesitscompositionandcharterinordertosettheriskmanagementframeworkoftheBankatleastannually.ToassisttheBoardinexecutingitsfunctions,itreviewsandapprovesthecompositionandchartersofthefollowingBoardsub-committees:
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Audit CommitteeTheAuditCommitteecomprisesGeorgeMorton(chairman),YusefAbuKhadraandYaserAlsharifi.Indischargingitsduties,thecommitteeisrequiredtoreviewtheauditors’remunerationand,indiscussionwiththem,toassesstheirindependenceandrecommendtheirre-appointmentattheAnnualGeneralMeeting.ThecommitteealsoreviewsthefinancialstatementspublishedinthenameoftheBoardandthequalityandacceptabilityoftherelatedaccountingpolicies,practicesandfinancialreportingdisclosures;thescopeofworkoftheinternalauditor,reportsfromtheinternalauditorandtheadequacyoftheirresources;theeffectivenessofthesystemsforinternalcontrol,riskmanagementandcompliancewithfinancialserviceslegislationandregulations;proceduresbywhichstaffmayraiseconcernsinconfidence;andtheresultsoftheexternalauditandreportsfromtheexternalauditorandtheirfindingsonaccountingandinternalcontrolsystems.Thechairmanofthecommitteehasheldameetingwiththeexternalauditors,withoutexecutivespresent,andameetingwiththeinternalauditoralone.
Nomination CommitteeTheNominationCommittee,whichcomprisesSalmanAbbasi(chairman),ShabirRandereeandMohammedAlSarhan,reviewsthecompositionoftheBoard,takingintoaccounttheskills,knowledgeandexperienceofDirectorsandconsidersandmakesrecommendationstotheBoardonpotentialcandidatesforappointmentasDirectors.ThecommitteealsomakesrecommendationstotheBoardconcerningthere-appointmentofanyNon-ExecutiveDirectorbytheBoardattheconclusionofhisorherspecifiedterm;there-electionofanyDirectorbytheshareholdersundertheretirementprovisionsoftheArticlesofAssociation;anymattersrelatingtothecontinuationinofficeofaDirector;andtheappointmentofanyDirectortoexecutiveorotheroffice,otherthanthepositionsofChairmanandChiefExecutiveOfficer,therecommendationforwhichwouldbeconsideredatameetingoftheNon-ExecutiveDirectorsregardingthepositionofChiefExecutiveOfficer,andalltheDirectorsregardingthepositionofChairman.
TheNominationCommitteeevaluates,normallyatleastannually,theperformanceoftheBoardanditscommitteesandmakesappropriaterecommendationstotheBoard.Thisisconductedthroughaself-assessmentprocessthatrequireseachDirectortoassessandratetheperformanceoftheBoardanditscommittees.TheresultsoftheexerciseareconsideredbytheBoardandappropriatestepsagreedandimplementedtoremedyanyareasofdeficiencyorconcern.
Remuneration CommitteeTheRemunerationCommittee,whichcomprisesYusefAbuKhadra(chairman),ShabirRandereeandAabedAlZeera,reviewstheremunerationpolicyforseniormanagement,toensurethatmembersoftheexecutiveareprovidedwithappropriateincentivestoencouragethemtoenhancetheperformanceoftheBankandthattheyarerewardedfortheirindividualcontributiontothesuccessoftheorganisation.Itisalsomadeawareof,andadviseson,majorchangestoemployeebenefitsschemes.AlltheNon-ExecutiveDirectorsareinvitedtoattendmeetingsiftheywish,andtheyreceivetheminutesandhavetheopportunitytocommentandhavetheirviewstakenintoaccountbeforethecommittee’sdecisionsareimplemented.
Board Risk CommitteeTheBoardRiskCommittee(‘BRC’)comprisesShabirRanderee(chairman),AabedAlZeera,GeorgeMorton,YusefAbuKhadra,MohammedAlSarhanandYaserAlsharifi.TheBRCassiststheBoardinfulfillingitsinvestmentriskmanagementresponsibilities;theseresponsibilitiesincludedeterminingtheBank’sriskprofileandensuringthatmanagementremainswithintheBoard’spredeterminedriskappetite.MeetingsareheldatleastquarterlyandincludetheChiefExecutiveOfficer,FinanceDirectorandHeadofRiskManagementbystandinginvitation.Thetermsofreferenceincludereviewingcapitaladequacy,liquidity,creditrisk,marketrisk,operationalriskandapprovalsundertheBoard’sdelegatedauthority.
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European Islamic Investment Bank PlcAnnual Report and Accounts 2010
15European Islamic Investment Bank PlcAnnual Report and Accounts 2010
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Executive Management CommitteeTheBankhasanExecutiveManagementCommitteetoassisttheChiefExecutiveOfficerinperforminghisduties.TheExecutiveManagementCommitteemembershipcomprisestheChiefExecutiveOfficer;FinanceDirector;HeadofRiskManagement;ManagingDirectorofTreasuryandCapitalMarkets;ManagingDirectorofPrivateEquityandCorporateAdvisory;HeadoftheBahrainRepresentativeOffice;andHeadofLegalandSharia’a.Specifically,thecommitteeconsidersthedevelopmentandimplementationofstrategy,operationalplans,policiesandbudgets;themonitoringofoperatingandfinancialperformance;theassessmentandcontrolofrisk;theprioritisationandallocationofresources;humanresources;andthemonitoringofcompetitiveforcesineachareaofoperation.Thecommittee,assistedbyitssub-committees:theriskmanagement,ITandassetandliabilitycommittees,alsosupportstheChiefExecutiveOfficerinensuringthedevelopment,implementationandeffectivenessoftheBank’sriskmanagementframeworkandthecleararticulationoftheBank’sriskpolicies,andinreviewingtheBank’saggregateriskexposuresandconcentrationsofrisk.ThecommitteemayhavespecificpowersdelegatedtoitbytheBoardfromtimetotimeand,followingtheexerciseofthesepowers,itreportstotheBoard.
ShareholdersTheBoardhasappointedMohammedAlSarhanastheSeniorIndependentDirector.HeisavailabletoshareholdersiftheyhaveconcernswhichcontactthroughthenormalchannelsofChairman,ChiefExecutiveOfficerorFinanceDirectorhasfailedtoresolve,orforwhichsuchcontactisinappropriate.TheBoardensurestheDirectorsdevelopanunderstandingoftheviewsofmajorshareholdersbyencouragingthemtomeetmajorshareholdersandattendshareholdermeetings;makingthemawareofviewsandfeedbackreceivedfromshareholders;andprovidingthemwithanalysts’andbrokers’briefingsontheBank.
Meetings and attendance
Main Board Audit Committee
Remuneration Committee
Nomination Committee
Board Risk Committee
No. of meetings in year 5 4 4 3 8
AdnanAhmedYousif(resigned2February2011)
4
ShabirRanderee 5 4 3 7
SalmanAbbasi 5 3
YusefAbuKhadra 4 4 4 8
ZaherAl-Ajjawi(resigned28April2010)
1 1
MohammedAlSarhan 3 2 4
YaserAlsharifi(appointed27July2010)
3 2
AabedAlZeera 4 4 8
GeorgeMorton 5 4 8
SubhiBenkhadra(appointedCEO15March2010)
5 1 1 3
KeithMcLeod 5
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In the name of Allah, The Beneficent, The Merciful
TotheShareholdersofEuropeanIslamicInvestmentBankplc(‘EIIB’)
Fortheperiod1January2010to31December2010(the‘Period’)
Assalamu Alaikum Wa Rahmat Allah Wa Barakatuh
IncompliancewithourlettersofappointmentwithEIIB,wearerequiredtosubmitthisreport.ThroughourSharia’aAuditCommittee,wehavereviewedtheprinciplesandthecontractsrelatingtotransactionsconductedbyEIIBduringthePeriod.WehaveconductedourreviewtoformanopinionastowhetherEIIBhascompliedwithSharia’arulesandprinciplesandalsowiththespecificfatwas,rulingsandguidelinesissuedbyus.
EIIB’smanagementisresponsibleforensuringthatEIIBconductsitsbusinessinaccordancewithSharia’arulesandprinciples.Itisourresponsibilitytoformanindependentopinion,basedonourreviewoftheoperationsofEIIB,andtoreporttoyou.
Ourreviewincludedexamining,onatestbasis,eachtypeoftransactionandtherelevantdocumentationandproceduresadoptedbyEIIBforthetransaction.Basedonthis,weareoftheopinionthatthecontracts,transactionsanddealingsenteredintobyEIIBduringthePeriodthatwerereviewedareincompliancewithSharia’arulesandprinciples.
WebegAllahtheAlmightytograntusallsuccessandstraight-forwardness. Wassalam Alaikum Wa Rahmat Allah Wa Barakatuh
22February2011
SignedbytheSharia’aSupervisoryBoardofEuropeanIslamicInvestmentBankplc
Dr.AbdulSattarAbuGhuddah Sh.NizamYacouby Dr.AbdulLatifAlMahmoodChairman DeputyChairman Member
ReportoftheSharia’aSupervisoryBoard
16 European Islamic Investment Bank PlcAnnual Report and Accounts 2010
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StatementofDirectors’ResponsibilitiesTheDirectorsareresponsibleforpreparingtheAnnualReportandthegroupandparentcompanyfinancialstatementsinaccordancewithapplicablelawandregulations.
CompanylawrequirestheDirectorstopreparegroupandparentcompanyfinancialstatementsforeachfinancialyear.AsrequiredbytheAIMRulesoftheLondonStockExchangetheyarerequiredtopreparethegroupfinancialstatementsinaccordancewithIFRSsasadoptedbytheEUandapplicablelawandhaveelectedtopreparetheparentcompanyfinancialstatementsonthesamebasis.
UndercompanylawtheDirectorsmustnotapprovethefinancialstatementsunlesstheyaresatisfiedthattheygiveatrueandfairviewofthestateofaffairsofthegroupandparentcompanyandoftheirprofitorlossforthatperiod.Inpreparingeachofthegroupandparentcompanyfinancialstatements,theDirectorsarerequiredto:
• selectsuitableaccountingpoliciesandthenapplythemconsistently;
• makejudgmentsandestimatesthatarereasonableandprudent;
• statewhethertheyhavebeenpreparedinaccordancewithIFRSsasadoptedbytheEU;and
• preparethefinancialstatementsonthegoingconcernbasisunlessitisinappropriatetopresume thatthegroupandtheparentcompanywillcontinueinbusiness.
TheDirectorsareresponsibleforkeepingadequateaccountingrecordsthataresufficienttoshowandexplaintheparentcompany’stransactionsanddisclosewithreasonableaccuracyatanytimethefinancialpositionoftheparentcompany’sandenablethemtoensurethatitsfinancialstatementscomplywiththeCompaniesAct2006.Theyhavegeneralresponsibilityfortakingsuchstepsasarereasonablyopentothemtosafeguardtheassetsofthegroupandtopreventanddetectfraudandotherirregularities.
TheDirectorsareresponsibleforthemaintenanceandintegrityofthecorporateandfinancialinformationincludedontheBank’swebsite.LegislationintheUKgoverningthepreparationandthedisseminationoffinancialstatementsmaydifferfromlegislationinotherjurisdictions.
17European Islamic Investment Bank PlcAnnual Report and Accounts 2010
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IndependentAuditor’sReporttotheMembersofEuropeanIslamicInvestmentBankPlcWehaveauditedthefinancialstatementsofEuropeanIslamicInvestmentBankplc(‘Bank’)fortheyearended31December2010setoutonpages20to79.ThefinancialreportingframeworkthathasbeenappliedintheirpreparationisapplicablelawandInternationalFinancialReportingStandards(‘IFRS’)asadoptedbytheEUand,asregardstheparentcompanyfinancialstatements,asappliedinaccordancewiththeprovisionsoftheCompaniesAct2006.
Thisreportismadesolelytothecompany’smembers,asabody,inaccordancewithChapter3ofPart16oftheCompaniesAct2006.Ourauditworkhasbeenundertakensothatwemightstatetothecompany’smembersthosematterswearerequiredtostatetotheminanauditor’sreportandfornootherpurpose.Tothefullestextentpermittedbylaw,wedonotacceptorassumeresponsibilitytoanyoneotherthanthecompanyandthecompany’smembers,asabody,forourauditwork,forthisreport,orfortheopinionswehaveformed.
Respective Responsibilities of Directors and Auditors AsexplainedmorefullyintheDirectors’ResponsibilitiesStatementsetoutonpage17,theDirectorsareresponsibleforthepreparationofthefinancialstatementsandforbeingsatisfiedthattheygiveatrueandfairview.Ourresponsibilityistoaudit,andexpressanopinionon,thefinancialstatementsinaccordancewithapplicablelawandInternationalStandardsonAuditing(UKandIreland).ThosestandardsrequireustocomplywiththeAuditingPracticesBoard’s(APB’s)EthicalStandardsforAuditors.
Scope of the Audit of the Financial StatementsAdescriptionofthescopeofanauditoffinancialstatementsisprovidedontheAPB’sweb-siteatwww.frc.org.uk/apb/scope/private.cfm
Opinion on Financial StatementsInouropinion:
• thefinancialstatementsgiveatrueandfairviewofthestateofthegroup’sandoftheparentcompany’saffairsasat31December2010andofthegroup’slossfortheyearthenended;
• thegroupfinancialstatementshavebeenproperlypreparedinaccordancewithIFRSasadoptedbytheEU;
• theparentcompany’sfinancialstatementshavebeenproperlypreparedinaccordancewithIFRSasadoptedbytheEUandasappliedinaccordancewiththeprovisionsoftheCompaniesAct2006;and
• thefinancialstatementshavebeenpreparedinaccordancewiththerequirementsoftheCompaniesAct2006.
Opinion on other matter prescribed by the Companies Act 2006 InouropiniontheinformationgivenintheDirectors’Reportforthefinancialyearforwhichthefinancialstatementsarepreparedisconsistentwiththefinancialstatements.
Matters on which we are required to report by exceptionWehavenothingtoreportinrespectofthefollowingmatterswheretheCompaniesAct2006requiresustoreporttoyouif,inouropinion:
• adequateaccountingrecordshavenotbeenkeptbythegroup,orreturnsadequateforouraudit havenotbeenreceivedfrombranchesnotvisitedbyus;or
• thegroupfinancialstatementsarenotinagreementwiththeaccountingrecordsandreturns;or
• certaindisclosuresofdirectors’remunerationspecifiedbylawarenotmade;or
• wehavenotreceivedalltheinformationandexplanationswerequireforouraudit.
PaulFurneauxSeniorStatutoryAuditorForandonbehalfofKPMGAuditPlc,StatutoryAuditor,CharteredAccountantsLondon7April2011
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‘EIIBbridgesthegapbetweenthefinancialmarketsoftheIslamicworldandthoseof
WesternandOECDterritories.’
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ConsolidatedStatementofComprehensiveIncomefortheyearended31December2010
Thenotesonpages29to79formanintegralpartofthefinancialstatements.
2010 2009 Notes £ £
Income Incomefromfinancingandinvestingactivities 4 1,981,365 3,774,911Returnstofinancialinstitutionsandcustomers 5 (118,968) (450,117)Net margin 1,862,397 3,324,794
Foreignexchange(losses)/gains 6 (121,810) 91,340Tradingincome 7 1,007,802 309,813Feesandcommissions 21,713 -Fairvaluegainonassetsdesignatedasfairvaluethroughincomestatement 16 1,729,139 -Oilandgasgrossprofit/(loss) 489,900 (355,930)Total operating income 4,989,141 3,370,017 Expenses Fairvaluelossonassetsdesignatedasfairvaluethroughincomestatement 16 - (4,134,525)Provisionforimpairmentoffinancingarrangements 14 - (6,351,575)Provisionforimpairmentofavailable-for-salesecurities 15 - (7,030,988)Impairmentofgoodwill - (954,077)Staffcosts 8 (7,470,561) (4,709,722)Depreciationandamortisation 18,19 (401,164) (405,596)Otheroperatingexpenses 9 (2,593,901) (2,657,533)Oilandgasoverheads (1,175,829) (824,715)Operating loss before tax 10 (6,652,314) (23,698,714)Tax 11 729,612 1,519,399Loss for the year (5,922,702) (22,179,315) Other comprehensive income Fairvaluegainonoilandgasdevelopmentassets 20,825,388 -Deferredtaxliabilityonoilandgasdevelopmentassets (7,288,886) -Netchangeinfairvalueofavailable-for-salesecurities (103,407) 1,744,575Netamounttransferredtoincomestatement - 1,322,950Exchangedifferenceonnetinvestmentinforeignoperations - 183,728
Total comprehensive income/(loss) for the year 7,510,393 (18,928,062) Loss attributable to: EquityholdersoftheBank (5,860,968) (22,013,425)Non-controllinginterest (61,734) (165,890) (5,922,702) (22,179,315)
Total comprehensive income/(loss) attributable to: EquityholdersoftheBank 4,252,508 (18,785,201)Non-controllinginterest 3,257,885 (142,861) 7,510,393 (18,928,062)
Earningspershare -basicanddiluted 12 (0.34p)(1.22p)
European Islamic Investment Bank PlcAnnual Report and Accounts 2010
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2010 2009 Notes £ £
Assets Cashandbalanceswithbanks 5,440,264 685,495Duefromfinancialinstitutions 13 91,728,189 120,295,974Quotedequityinvestmentsdesignatedatfairvalue 11,914,897 -Available-for-salesecurities-sukuk 15 18,166,794 23,496,214Available-for-salesecurities-equity - 127,817Financingarrangements 14 11,250,000 11,250,000Privateequityfinancialassetsdesignatedatfairvalue 16 14,336,526 750,438Fairvalueofforeignexchangeagreements 17 36,437 30,091Plantandequipment 18 192,448 191,061Intangibleassets 19 161,675 415,512Oilandgasproperties 31.2 26,362,667 7,032,334Otherassets 20 1,951,788 1,747,471Currenttaxasset 11 - 955,973Total assets 181,541,685 166,978,380 Liabilities Duetofinancialinstitutions 21 20,037,511 21,273,067Duetocustomers 22 1,021,055 1,009,533Fairvalueofforeignexchangeagreements 17 373,810 539,811Otherliabilities 23 5,739,111 2,837,556Deferredtaxliability 11 7,288,886 -Total liabilities 34,460,373 25,659,967 Shareholders’ equity Sharecapital 28 17,656,585 17,656,585Sharepremiumaccount 28 116,219,800 116,219,800Capitalredemptionreserve 28 599,040 599,040Treasuryshares 29 (2,117,015) -Fairvaluereserveonavailable-for-salesecurities (264,568) (161,161)Fairvaluereserveonoilandgasdevelopmentassets 10,216,883 -Foreignexchangereserve - 160,699Sharebasedpaymentreserve 136,138 -Retainedearnings 629,207 5,903,845Total equity attributable to the Bank’s equity holders 143,076,070 140,378,808 Non-controlling interest 4,005,242 939,605Total equity 147,081,312 141,318,413 Total equity and liabilities 181,541,685 166,978,380
ConsolidatedStatementofFinancialPositionat31December2010
Thenotesonpages29to79formanintegralpartofthefinancialstatements.
KeithMcLeodFinanceDirectorandDeputyChiefExecutiveOfficer
SubhiBenkhadraChiefExecutiveOfficer
European Islamic Investment Bank PlcAnnual Report and Accounts 2010
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Share Capital Share premium redemption Treasury capital account reserve shares £ £ £ £
Balanceat1January2009 18,255,625 164,229,939 - -Creationofspecialreserve - (48,010,139) - -Redemption/repurchaseofshares (599,040) - 599,040 -Noncontrollinginterestarisingonbusinesscombinations - - - - 17,656,585 116,219,800 599,040 -
Netchangeinfairvalueofavailable-for-salesecurities Netamounttransferredtoincomestatement Lossfortheyear Foreignexchangereserve Transferfromspecialreserve Totalcomprehensiveloss
Balance at 31 December 2009 17,656,585 116,219,800 599,040 -Balanceat1January2010 17,656,585 116,219,800 599,040 -PurchaseofTreasuryshares - - - (2,117,015)Costofsharebasedpaymentarrangements - - - -Gainmadeonfurtheracquisitionofsubsidiary - - - -Noncontrollinginterestarisingonbusinesscombinations - - - - 17,656,585 116,219,800 599,040 (2,117,015) Netchangeinfairvalueofavailable-for-salesecurities Transfers Lossfortheyear Fairvaluegainonoilandgasdevelopmentassets Deferredtaxliabilityonoilandgasdevelopmentassets Totalcomprehensiveincome Balance at 31 December 2010 17,656,585 116,219,800 599,040 (2,117,015)
ConsolidatedStatementofChangesinEquityfortheyearended31December2010
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Fair Share Fair value value reserve based reserve on O&G Foreign Non Special payment on AFS development exchange Retained controlling Total equity reserve reserve securities assets reserve earnings interest - Group £ £ £ £ £ £ £ £
- - (3,228,686) - - (15,899,590) - 163,357,288 48,010,139 - - - - - - - (4,193,279) - - - - - - (4,193,279) - - - - - - 1,082,466 1,082,466 43,816,860 - (3,228,686) - - (15,899,590) 1,082,466 160,246,475
1,744,575 - - - - 1,744,575 1,322,950 - - - - 1,322,950 - - - (22,013,425) (165,890) (22,179,315)
- - 160,699 - 23,029 183,728(43,816,860) - - - - 43,816,860 - -(43,816,860) - 3,067,525 - 160,699 21,803,435 (142,861) (18,928,062)
- - (161,161) - 160,699 5,903,845 939,605 141,318,413 - - (161,161) - 160,699 5,903,845 939,605 141,318,413 - - - - - - - (2,117,015) - 136,138 - - - - - 136,138 - - - - - 425,631 - 425,631 - - - - - - (192,248) (192,248) - 136,138 (161,161) - 160,699 6,329,476 747,357 139,570,919 (103,407) - - - - (103,407) - - (160,699) 160,699 - - - - - (5,860,968) (61,734) (5,922,702) - 15,718,282 - - 5,107,106 20,825,388 - (5,501,399) - - (1,787,487) (7,288,886) (103,407) 10,216,883 (160,699) (5,700,269) 3,257,885 7,510,393 - 136,138 (264,568) 10,216,883 - 629,207 4,005,242 147,081,312
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2010 2009 £ £
Cash flows from operating activities Operatinglossfortheyear (6,652,314) (23,698,714)Adjustedfor:Provisionforimpairmentoffinancialassets - 14,336,640Netlossoninvestmentsecuritiesatfairvaluethroughincomestatement - 4,134,525Fairvaluegainsonprivateequityassets (1,729,139) -Depreciationandamortisation 401,164 405,596Lossondisposalofplantandequipment 28,751 -Fairvalueofforeignexchangeagreements (172,346) (1,394,446)Chargesforshareawards 136,138 -Net(increase)/decreaseinoperatingassets:Duefromfinancialinstitutions 28,567,785 24,069,917Quotedequityinvestments-FVTPL (11,914,897) -Financingarrangements - 10,788,605Available-for-salesecurities-sukuk 5,226,013 29,421,992Available-for-salesecurities-equity 127,817 (127,817)Privateequityfinancialassetsdesignatedatfairvalue (11,856,948) -Investmentproperty - 38,699,245Oilandgasproperties 1,728,439 -Otherassets (204,318) 1,561,775Netincrease/(decrease)inoperatingliabilities:Duetofinancialinstitutions (1,235,556) (85,811,364)Duetocustomers 11,521 (1,718,988)Otherliabilities 3,401,554 (163,258)Taxation:Corporationtaxrecovered 1,185,585 785,471Net cash inflow from operating activities 7,049,249 11,289,179
Cash flows from investing activitiesAcquisitionofsubsidiaries,netofcashacquired - (7,347,144)Purchaseofplantandequipment (140,966) (15,878)Purchaseofintangibleassets (36,499) (19,923)Net cash outflow from investing activities (177,465) (7,382,945)
Cash flows from financing activitiesPaymentonTreasuryshares (2,117,015) -Redemptionofshares - (4,193,279)Net cash outflow from financing activities (2,117,015) (4,193,279)
Net increase/(decrease) in cash and cash equivalents 4,754,769 (287,045)
Cashandcashequivalentsatthebeginningoftheyear 685,495 972,540Cash and cash equivalents at the end of the year 5,440,264 685,495
ConsolidatedStatementofCashFlowsfortheyearended31December2010
Thenotesonpages29to79formanintegralpartofthefinancialstatements.
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2010 2009 Notes £ £
Assets Cashandbalanceswithbanks 697,725 459,065Duefromfinancialinstitutions 13 91,728,189 120,295,974Quotedequityinvestmentsdesignatedatfairvalue 549,623 -Available-for-salesecurities-sukuk 15 18,166,794 23,496,214Available-for-salesecurities-equity - 127,817Financingarrangements 14 11,250,000 11,250,000Privateequityfinancialassetsdesignatedatfairvalue 16 - 750,438Investmentsinsubsidiaries 31 63,108,959 6,345,002Fairvalueofforeignexchangeagreements 17 36,437 30,091Plantandequipment 18 192,448 191,061Intangibleassets 19 161,675 415,512Otherassets 20 1,194,329 1,072,362Currenttaxasset 11 - 955,973Total assets 187,086,179 165,389,509 Liabilities Duetofinancialinstitutions 21 20,037,511 21,273,067Duetocustomers 22 1,021,055 1,009,533Duetogroupentities 17,451,998 -Fairvalueofforeignexchangeagreements 17 373,810 539,811Otherliabilities 23 5,125,735 2,188,290Total liabilities 44,010,109 25,010,701 Shareholders’ equity Sharecapital 28 17,656,585 17,656,585Sharepremiumaccount 28 116,219,800 116,219,800Capitalredemptionreserve 28 599,040 599,040Treasuryshares 29 (2,117,015) -Fairvaluereserveonavailable-for-salesecurities (264,568) (161,161)Sharebasedpaymentreserve 136,138 -Retainedearnings 10,846,090 6,064,544Total equity attributable to the Bank’s equity holders 143,076,070 140,378,808 Total equity and liabilities 187,086,179 165,389,509
CompanyStatementofFinancialPositionat31December2010
Thenotesonpages29to79formanintegralpartofthefinancialstatements.
KeithMcLeodFinanceDirectorandDeputyChiefExecutiveOfficer
SubhiBenkhadraChiefExecutiveOfficer
European Islamic Investment Bank PlcAnnual Report and Accounts 2010
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Share Capital Share premium redemption capital account reserve £ £ £
Balanceat1January2009 18,255,625 164,229,939 -Creationofspecialreserve - (48,010,139) -Redemption/repurchaseofshares (599,040) - 599,040 17,656,585 116,219,800 599,040 Netchangeinfairvalueofavailable-for-salesecurities Netamounttransferredtoincomestatement Lossfortheyear TransferfromSpecialReserve Totalcomprehensiveincome Balance at 31 December 2009 17,656,585 116,219,800 599,040 Balanceat1January2010 17,656,585 116,219,800 599,040PurchaseofTreasuryshares - - -Costofsharebasedpaymentarrangements - - - 17,656,585 116,219,800 599,040 Netchangeinfairvalueofavailable-for-salesecurities Incomefortheyear Totalcomprehensiveincome Balance at 31 December 2010 17,656,585 116,219,800 599,040
CompanyStatementofChangesinEquityfortheyearended31December2010
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Share Fair value based reserve Treasury Special payment on AFS Retained Total equity shares reserve reserve securities earnings - Company £ £ £ £ £
- - - (3,228,686) (15,899,590) 163,357,288 - 48,010,139 - - - - - (4,193,279) - - - (4,193,279) - 43,816,860 - (3,228,686) (15,899,590) 159,164,009 - 1,744,575 - 1,744,575 - 1,322,950 - 1,322,950 - - (21,852,726) (21,852,726) (43,816,860) - - 43,816,860 - (43,816,860) - 3,067,525 21,964,134 (18,785,201) - - - (161,161) 6,064,544 140,378,808 - - - (161,161) 6,064,544 140,378,808 (2,117,015) - - - - (2,117,015) - - 136,138 - - 136,138 (2,117,015) - 136,138 (161,161) 6,064,544 138,397,931 - - (103,407) - (103,407) - - - 4,781,546 4,781,546 - - (103,407) 4,781,546 4,678,139 (2,117,015) - 136,138 (264,568) 10,846,090 143,076,070
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2010 2009 £ £
Cash flows from operating activities Operatingprofit/(loss)beforetax 4,051,999 (23,372,145)Adjustedfor: Fairvaluegainonsubsidiaryinvestments (11,757,858) -Provisionforimpairmentoffinancialassets - 13,382,561Netlossoninvestmentsecuritiesatfairvaluethroughincomestatement - 5,942,657Depreciationandamortisation 401,164 405,596Lossondisposalofplantandequipment 28,751 -Fairvalueofforeignexchangeagreements (172,346) (1,394,446)Chargesforshareawards 136,138 -Net(increase)/decreaseinoperatingassets:
Duefromfinancialinstitutions 28,567,785 24,069,917Quotedequityinvestments-FVTPL (549,623) -Financingarrangements - 10,788,605Available-for-salesecurities-sukuk 5,226,013 29,421,992Available-for-salesecurities-equity 127,817 (127,817)Otherassets (121,965) 653,157
Netincrease/(decrease)inoperatingliabilities: Duetofinancialinstitutions (1,235,556) (46,761,364)Duetogroupentities 17,451,998 -Duetocustomers 11,521 (1,718,988)Otherliabilities 3,437,441 113,216
Taxation: Corporationtaxrecovered 1,185,585 785,471
Net cash inflow from operating activities 46,788,864 12,188,412
Cash flows from investing activitiesDisposalofasubsidiary 7,204,911 -DisposalofPrivateequityassetsdesignatedatfairvalue 750,439 -Investmentsinsubsidiaries (52,211,074) (8,153,134)Purchaseofplantandequipment (140,966) (15,878)Purchaseofintangibleassets (36,499) (19,923)Net cash outflow from investing activities (44,433,189) (8,188,935)
Cash flows from financing activitiesPaymentonTreasuryshares (2,117,015) -Redemptionofshares - (4,193,279)Net cash outflow from financing activities (2,117,015) (4,193,279)
Net increase/(decrease) in cash and cash equivalents 238,660 (193,802)
Cashandcashequivalentsatthebeginningoftheyear 459,065 652,867Cash and cash equivalents at the end of the year 697,725 459,065
CompanyStatementofCashFlowsfortheyearended31December2010
Thenotesonpages29to79formanintegralpartofthefinancialstatements.
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NotestotheFinancialStatementsat31December2010
1. Principal activities, definitions and authorisation of the financial statements
EuropeanIslamicInvestmentBankplc(‘EIIB’or‘Bank’)wasincorporatedasthefirstindependent,UKbasedIslamicinvestmentbankmanagedonawhollySharia’acompliantbasis.TheactivitiesoftheBankarefocusedonservicingclientsinternationallythroughtheprovisionof;Bankingservicesencompassingdeposittaking,provisionoffinancing,treasuryservices,structuredproductsandtradinginIslamicandSharia’acompliantsecurities;InvestmentManagementencompassingquotedequities,privateequityandrealestate;andFinancialServicesencompassingcorporatefinance,custody,trustandfundadministrationactivitiesandbusinessadvisoryservices.
TheBankisacompanyincorporatedintheUKwhichwasestablishedon11January2005andreceivedauthorisationfromtheFSAon8March2006tocarryonactivitiesasaninvestmentbank.
TheconsolidatedfinancialstatementsoftheBankasatandfortheyearended31December2010comprisetheBankanditssubsidiaries(togetherreferredtoasthe‘Group’andindividuallyas‘Groupentities’).
Thefollowingtermsareusedinthefinancialstatements:
Murabaha(Notes13,14&21)isasaleofgoodsatacostplusanagreedprofitmarkupunderwhichaparty(theseller)purchasesgoodsatcostpricefromasupplierandsellsthegoodstoanother(thebuyer)atacostplusanagreedmarkup.Commoditymurabaha,wherebycommoditiesareboughtandsoldareacommonformofIslamicfinancingtransaction.
Sukuk(Note15)arecertificatesofequalvaluerepresentingundividedsharesinownershipoftangibleassets,usufructandservicesor(intheownershipof)theassetsofparticularprojectsorspecialinvestmentactivities.Sukukareusuallytradableandyieldperiodicprofitdistributions.
Wakala(Notes13,21&22)meansagencyandcanbeusedinanarrangementwherebyoneparty(theprincipal)placesfundswithanother(theagent)forinvestmentbytheagentontheprincipal’sbehalfinreturnforanagreedfeeorcommission.
ThefinancialstatementsofEuropeanIslamicInvestmentBankplcfortheyearended31December2010wereauthorisedforissuebytheBoardofDirectorson6April2011.
2. Accounting policies
2.1 Basis of preparation Thefinancialstatementshavebeenpreparedunderthehistoricalcostaccountingconventionexceptforoilandgasdevelopmentassetsandfinancialassetsandliabilitiesstatedattheirfairvaluecomprisingavailable-for-salesecurities,financialassetsdesignatedatfairvalueandfairvalueofforeignexchangeagreements.
Aspermittedbysections.408oftheCompaniesAct2006theincomestatementoftheparententityisnotpresentedaspartofthefinancialstatements.Theparententity’sprofitaftertaxfortheyearended31December2010was£4,781,546(2009:loss£21,852,726).
2.2 Compliance with International Financial Reporting StandardsTheconsolidatedfinancialstatementsandthefinancialstatementsoftheBankhavebeenpreparedinaccordancewithInternationalFinancialReportingStandards(‘IFRS’)asadoptedbytheEuropeanUnion.
2.3 New accounting policy, disclosures and changes to the accounting policiesTheaccountingpoliciesappliedbytheGroupintheseconsolidatedfinancialstatementsarethesameasthoseappliedbytheGroupinitsfinancialstatementsasatandfortheyearended31December2009exceptfortheintroductionofthefollowingaccountingpolicyduringtheyear.
2.3.1 Oil and gas properties TheGroupceasestoclassifyanexplorationandevaluationassetassuchwhenthetechnicalfeasibilityandcommercialviabilityofextractingamineralresourcearedemonstrable.Explorationandevaluationassetsareassessedforimpairment,andanyimpairmentlossisrecognisedbeforetheirreclassificationtodevelopmentassets.
TheaccountingtreatmentofdevelopmentoilandgasassetsisnotspecificallyaddressedbyIFRS,thereforetheGrouphaselectedtodevelopandapplyanaccountingpolicyinaccordancewiththehierarchyfortheselectionofaccountingpoliciesofIAS8.TheGroupbelievesthattheselectedaccountingpolicyresultsininformationthatisboth
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relevantandreliabletotheeconomicdecisionsofusersofthefinancialstatements.
TheGroupbelievesthatthemostappropriatestandardtobeconsideredandusedasaproxyfortheaccountingtreatmentofdevelopmentoilandgasassetsisIAS16Property,PlantandEquipment.
Underthisaccountingpolicy,alldevelopmentoilandgasassetsaremeasuredatcostatinitialrecognitionwhilearevaluationmodelisadoptedforsubsequentmeasurement.Afterinitialrecognition,assetswhosefairvaluecanbemeasuredreliablyarecarriedattherevaluedamount,beingfairvalueatthedateoftherevaluation.Thefairvalueofdevelopmentoilandgasassetsisestimatedusinganincomeapproach.
Allincreasesasaresultofarevaluationarerecognisedinothercomprehensiveincomeandaccumulatedinequity.Therevaluationsurplusincludedinequityistransferreddirectlytoretainedearningswhentheassetisretiredordisposedof.
DisclosuresinrespectoftherevaluationmodelusedinthefinancialstatementsareincludedinNote31.2anddisclosuresinrespectofthesignificantaccountingjudgementsandestimatesmadeindeterminingthefairvalueofdevelopmentoilandgasdevelopmentassetsareincludedinNote2.11.3.
2.4 Accounting for business combinationsTheGroupadoptedIFRS3BusinessCombinations(2008)andIAS27ConsolidatedandSeparateFinancialStatements(2008)forbusinesscombinationsoccurringinthefinancialyearstarting1January2009.Businesscombinationsoccurringonorafter1January2009areaccountedforbyapplyingtheacquisitionmethod.
Controlisthepowertogovernthefinancialandoperatingpoliciesofanentitysoastoobtainbenefitsfromitsactivities.Inassessingcontrol,theGrouptakesintoconsiderationpotentialvotingrightsthatarecurrentlyexercisable.Theacquisitiondateisthedateonwhichcontrolistransferredtotheacquirer.Judgementisappliedindeterminingtheacquisitiondateanddeterminingwhethercontrolistransferredfromonepartytoanother.
TheGroupmeasuresgoodwillasthefairvalueoftheconsiderationtransferredincludingtherecognisedamountofanynon-controllinginterest
intheacquiree,lessthenetrecognisedamount(generallyfairvalue)oftheidentifiableassetsacquiredandliabilitiesassumed,allmeasuredasoftheacquisitiondate.Whentheexcessisnegative,abargainpurchasegainisrecognisedimmediatelyintheprofitorloss.
TheGroupelectsonatransaction-by-transactionbasiswhethertomeasurenon-controllinginterestatitsfairvalue,oratitsproportionateshareoftherecognisedamountoftheidentifiablenetassets,attheacquisitiondate.
Transactioncosts,otherthanthoseassociatedwiththeissueofdebtorequitysecurities,thattheGroupincurredinconnectionwithbusinesscombinationswerecapitalisedaspartofthecostofacquisitions.
2.5 Determination and presentation of operating segmentsTheGrouphasearlyadoptedIFRS8Operating Segmentsasof1January2009.ThisStandardrequiresthepresentationoffinancialinformationforsegmentsbasedoninformationthatisinternallypresentedtothedecisionmakingfunctionforthepurposesofresourceallocationandperformanceassessment.AnoperatingsegmentisacomponentoftheGroupthatengagesinbusinessactivitiesfromwhichitmayearnrevenuesandincurexpenses.
2.6 Presentation of financial statementsTheGrouphasappliedIAS1Presentation of Financial Statements(2007),whichbecameeffectiveasof1January2009.
2.7 Disclosure pertaining to fair values and liquidity risk for financial instrumentsTheGrouphasapplied Improving Disclosures about Financial Instruments (AmendmentstoIFRS7)issuedinMarch2009,thatrequireenhanceddisclosuresaboutfairvaluemeasurementsandliquidityriskinrespectoffinancialinstruments.
Theamendmentsrequirethatfairvaluemeasurementdisclosuresuseathree-levelfairvaluehierarchythatreflectsthesignificanceoftheinputsusedinmeasuringfairvaluesoffinancialinstruments.SpecificdisclosuresarerequiredwhenfairvaluemeasurementsarecategorisedasLevel3(significantunobservableinputs)inthefairvaluehierarchy.TheamendmentsrequirethatanysignificanttransfersbetweenLevel1andLevel2ofthefairvaluehierarchybedisclosedseparately,distinguishingbetweentransfersintoandoutofeachlevel.
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Furthermore,changesinvaluationtechniquesfromoneperiodtoanother,includingthereasonstherefore,arerequiredtobedisclosedforeachclassoffinancialinstruments.
DisclosuresinrespectoffairvaluesofassetsareincludedinNote33.
Further,thedefinitionofliquidityriskhasbeenamendedanditisnowdefinedastheriskthatanentitywillencounterdifficultyinmeetingobligationsassociatedwithfinancialliabilitiesthataresettledbydeliveringcashoranotherfinancialasset.
DisclosuresinrespectofliquidityriskareincludedinNote34.
2.8 Standards and interpretations issued but not yet effective Newstandards,amendmentsandinterpretationstoexistingstandardswhichhavebeenpublishedbyIASBandIFRICwithaneffectivedateafterthedateofthesefinancialstatementsand,whichtheBankhasnotearlyadopted,areasfollows:
• IAS24(Amendments)Related party transactions (effective date 1 January 2011)
• IAS32Presentation: Classification of Rights issues (effective 1 February 2010*)
• IFRS3(Amendments)Business combinations (effective 1 July 2010*)
• IFRS7(Amendments)Financial Instruments: Disclosures (effective 1 July 2011)
• IFRS9Financial Instruments (effective 1 January 2013)
• ImprovementstoIFRS2010:IAS1(presentation of statement of changes in equity),IAS27(transition requirements),IFRS7(amendments to disclosures)(effective 1 January 2011)
TheGroupanticipatesthattheaccountingpronouncementswhichhavenotbeenearlyadoptedwillhavenomaterialeffectonthefinancialstatementsexceptforIFRS9.TheGroupiscurrentlyintheprocessofevaluatingthepotentialeffectofthisstandard.
*for financial periods starting on or after this date
2.9 Basis of consolidation
Subsidiaries TheconsolidatedfinancialstatementsoftheBankcomprisethefinancialstatementsofEuropean
IslamicInvestmentBankplcandtheentitiestheBankcontrols.ControlexistswheretheBankhasthepowertogovernthefinancialandoperatingpoliciesoftheentitysoastoobtainbenefitsfromitsactivities.ControlledentitiesareconsolidatedfromthedateonwhichcontrolistransferredtotheBankandtheyaredeconsolidatedfromthedatethecontrolceases.Allintra-groupbalances,transactions,incomeandexpensesandprofitsandlossesresultingfromintra-grouptransactionsareeliminatedinfulluponconsolidation.
AssociatesAssociatesarethoseentitiesinwhichtheGrouphassignificantinfluence,butnotcontrol,overthefinancialandoperatingpolicies.InvestmentsthatareheldaspartoftheGroup’sinvestmentportfolioarecarriedinthebalancesheetatfairvalueeventhoughtheGroupmayhavesignificantinfluenceoverthosecompanies.ThistreatmentispermittedbyIAS28Investment in Associates,whichrequiresinvestmentsheldbyventurecapitalorganisationstobeexcludedfromitsscopewherethoseinvestmentsaredesignated,uponinitialrecognition,asatfairvaluethroughprofitorlossandaccountedforinaccordancewithIAS39,withchangesinfairvaluerecognisedintheincomestatementintheperiodofthechange.TheGrouphasnointerestsinassociatesthroughwhichitcarriesonitsbusiness.
2.10 Going concernInapprovingthefinancialstatementstheDirectorshavereviewedthecurrentandpotentialfuturebusinessactivitiesandfinancialpositionoftheGroup,includinganassessmentofthecapitaladequacyandliquidityforecasts.
TheGrouphadtotalassetsof£182mat31December2010(£167mat31December2009)andaminimumregulatorycapitalrequirementthereonof£12.7m(31December2009:£13.6m).TheBaseCapitalatDecember2010stoodat£79.6m(31December2009:£132.9m)whichis6.3times(31December2009:9.8)therequiredminimum.
ThebalancesheetofEIIBremainshighlyliquid.Asat31December2010,thenetcashexcess(calculatedasapercentageofdeposits)is+19%(31December2009:+159%)inthe8daysandundercategory,and+70%(31December2009:+361%)inthe1monthandundercategory,againstminimumrequirementsof0%and-5%respectively.TheliquidityratiohasdeclinedtomoreefficientlevelsinlinewiththeBank’smoreactiveinvestmentstrategy.
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Basedupontheabove,theDirectorsaresatisfiedthattheGrouphasadequateresourcestocontinueinbusinessfortheforeseeablefuture.ForthisreasontheDirectorscontinuetoadoptthegoingconcernbasisinpreparingthefinancialstatements.
2.11 Significant accounting judgements and estimatesInapplyingaccountingpolicies,managementhastoexerciseitsjudgementandmakeestimatesindeterminingtheamountsrecognisedinthefinancialstatements.However,thenatureofestimationmeansthatactualoutcomescoulddifferfromthoseestimates.Themostsignificantaresetoutbelow.
2.11.1 Fair value of financial instrumentsFairvalueistheamountforwhichanassetcouldbeexchanged,oraliabilitysettled,betweenknowledgeable,willingpartiesinanarm’slengthtransactiononthemeasurementdate.
Whenavailable,theGroupmeasuresthefairvalueofaninstrumentusingquotedpricesinanactivemarketforthatinstrument.Amarketisregardedasactiveifquotedpricesarereadilyandregularlyavailableandrepresentactualandregularlyoccurringmarkettransactionsonanarm’slengthbasis.
Ifamarketforafinancialinstrumentisnotactive,theGroupestablishesfairvalueusingavaluationtechnique.Valuationtechniquesincludeusingrecentarm’slengthtransactionsbetweenknowledgeable,willingparties(ifavailable),referencetothecurrentfairvalueofotherinstrumentsthataresubstantiallythesame,discountedcashflowanalysesandoptionpricingmodels.Thechosenvaluationtechniquemakesmaximumuseofmarketinputs,reliesaslittleaspossibleonestimatesspecifictotheGroup,incorporatesallfactorsthatmarketparticipantswouldconsiderinsettingaprice,andisconsistentwithacceptedeconomicmethodologiesforpricingfinancialinstruments.Inputstovaluationtechniquesreasonablyrepresentmarketexpectationsandmeasuresoftherisk-returnfactorsinherentinthefinancialinstrument.TheGroupcalibratesvaluationtechniquesandteststhemforvalidityusingpricesfromobservablecurrentmarkettransactionsinthesameinstrumentorbasedonotheravailableobservablemarketdata.
Thebestevidenceofthefairvalueofafinancialinstrumentatinitialrecognitionisthetransactionprice,i.e.thefairvalueoftheconsideration
givenorreceived,unlessthefairvalueofthatinstrumentisevidencedbycomparisonwithotherobservablecurrentmarkettransactionsinthesameinstrument(i.e.withoutmodificationorrepackaging)orbasedonavaluationtechniquewhosevariablesincludeonlydatafromobservablemarkets.Whentransactionpriceprovidesthebestevidenceoffairvalueatinitialrecognition,thefinancialinstrumentisinitiallymeasuredatthetransactionpriceandanydifferencebetweenthispriceandthevalueinitiallyobtainedfromavaluationmodelissubsequentlyrecognisedinprofitorlossonanappropriatebasisoverthelifeoftheinstrumentbutnotlaterthanwhenthevaluationissupportedwhollybyobservablemarketdataorthetransactionisclosedout.
Assetsandlongpositionsaremeasuredatabidprice;liabilitiesandshortpositionsaremeasuredatanaskingprice.WheretheGrouphaspositionswithoffsettingrisks,mid-marketpricesareusedtomeasuretheoffsettingriskpositionsandabidoraskingpriceadjustmentisappliedonlytothenetopenpositionasappropriate.FairvaluesreflectthecreditriskoftheinstrumentandincludeadjustmentstotakeaccountofthecreditriskoftheGroupentityandthecounterpartywhereappropriate.Fairvalueestimatesobtainedfrommodelsareadjustedforanyotherfactors,suchasliquidityriskormodeluncertainties,totheextentthattheGroupbelievesathird-partymarketparticipantwouldtakethemintoaccountinpricingatransaction.
TheDirectorsconsiderthefairvalueofthefinancialassetsandliabilitiesheldatamortisedcosttobemateriallyequaltothecarryingvalueofthoseassetsandliabilitiesinthebalancesheetasat31December2010.
2.11.2 Provisions for impairment of financial assets AteachreportingdatetheGroupassesseswhetherthereisobjectiveevidencethatfinancialassetsnotcarriedatfairvaluethroughprofitorlossareimpaired.Afinancialassetoragroupoffinancialassetsis(are)impairedwhenobjectiveevidencedemonstratesthatalosseventhasoccurredaftertheinitialrecognitionoftheasset(s),andthatthelosseventhasanimpactonthefuturecashflowsoftheasset(s)thatcanbeestimatedreliably.
Objectiveevidencethatfinancialassets(includingequitysecurities)areimpairedcanincludesignificantfinancialdifficultyoftheborrowerorissuer,defaultordelinquencybyaborrower,
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restructuringofaloanoradvancebytheGroupontermsthattheGroupwouldnototherwiseconsider,indicationsthataborrowerorissuerwillenterbankruptcy,thedisappearanceofanactivemarketforasecurity,orotherobservabledatarelatingtoagroupofassetssuchasadversechangesinthepaymentstatusofborrowersorissuersinthegroup,oreconomicconditionsthatcorrelatewithdefaultsinthegroup.Inaddition,foraninvestmentinanequitysecurity,asignificantorprolongeddeclineinitsfairvaluebelowitscostisobjectiveevidenceofimpairment.
TheGroupconsidersevidenceofimpairmentforassetscarriedatamortisedcostatspecificassetlevel.Allindividuallysignificantassetscarriedatamortisedcostareassessedforspecificimpairment.
Impairmentlossesonassetscarriedatamortisedcostaremeasuredasthedifferencebetweenthecarryingamountofthefinancialassetandthepresentvalueofestimatedfuturecashflowsdiscountedattheasset’soriginaleffectiveprofitrate.Impairmentlossesarerecognisedinprofitorlossandreflectedinanallowanceaccount.Profitonimpairedassetscontinuestoberecognisedthroughtheunwindingofthediscount.Whenasubsequenteventcausestheamountofimpairmentlosstodecrease,thedecreaseinimpairmentlossisreversedthroughprofitorloss.
Impairmentlossesonavailable-for-saleinvestmentsecuritiesarerecognisedbytransferringthecumulativelossthathasbeenrecognisedinothercomprehensiveincometoprofitorlossasareclassificationadjustment.Thecumulativelossthatisreclassifiedfromothercomprehensiveincometoprofitorlossisthedifferencebetweentheacquisitioncost,netofanyprincipalrepaymentandamortisation,andthecurrentfairvalue,lessanyimpairmentlosspreviouslyrecognisedinprofitorloss.Changesinimpairmentprovisionsattributabletotimevaluearereflectedasacomponentofprofitincome.
If,inasubsequentperiod,thefairvalueofanimpairedavailable-for-saledebtsecurityincreasesandtheincreasecanbeobjectivelyrelatedtoaneventoccurringaftertheimpairmentlosswasrecognisedinprofitorloss,theimpairmentlossisreversed,withtheamountofthereversalrecognisedinprofitorloss.However,anysubsequentrecoveryinthefairvalueofanimpairedavailable-for-saleequitysecurityisrecognisedinothercomprehensiveincome.TheGroupwritesoffcertaininvestmentsecuritieswhentheyaredeterminedtobeuncollectible.
2.11.3 Oil and gas properties Oilandgasassetsthathaveprovencommercialviabilityandtechnicalfeasibilityaretreatedas‘O&Gdevelopmentassets’,measuredatfairvalueonthereportingdate.Fairvaluesareassessedbasedonanalysisofexpectedcashflowforecasts,basedontechnicalreserveaudits(‘incomeapproach’).Comparablemarketinformationisusedtoobtainfurthercomfortonthesefairvalues.
Theincomeapproachisbasedonmanagement’sbestestimationofprojectedcashflowsdiscountedatanappropriatediscountrate.Assessmentsontheseinvolvesignificantjudgements.Resultsoftheevaluationunderthisapproacharebasedonexpectedfutureeventsorconditions,suchassalesprices,estimatesoffutureoilandgasproduction,developmentandoperatingcostsandthetimingthereof,economicandregulatoryclimateandotherfactors.TheincomeapproachassessmentutilisesSocietyofPetroleumEngineers-PetroleumResourcesManagementSystem(‘SPE-PRMS’)reservedefinitionsandNewYorkMercantileExchange(‘NYMEX’)oilandgaspricecurvesasonthevaluationdate.Reservesarefurtheradjustedforrisksbasedonreservecategorisations.
Estimatesofreservesaremadewithreferencetoavailablegeologicalandengineeringdataandincludevolumesforwhichaccesstomarketisassuredwithreasonablecertainty.ThereservesareallocatedtodifferentcategoriesbasedontheSPE-PRMSdefinitionsandaresubjectedtoriskfactorsbasedontheassetandcategoryspecificrisksinvolved.Oilandgasreserveexpertsareutilisedbymanagementfortheassessmentofreservequantitiesandthecashflowsthereof.
Inaccountingfortheoilandgasdevelopmentassets,managementelectedtodevelopandapplyanaccountingpolicytoreflectthefairvalueoftheGroup’soilandgasproperties.Please|refertotheNote2.3.1forthedetailedaccountingpolicy.
Accountingforfairvaluegainsandlossesonoilandgaspropertiespromptstheestimationandrecognitionofcorrespondingtaxliability.Managementhasestimatedthisdeferredliabilityinaccordancewiththetaxlegislationintheapplicablejurisdiction.
2.11.4 Impairment of other non-financial assetsThecarryingamountsoftheGroup’snon-financialassetsarereviewedateachreportingdatetodeterminewhetherthereisanyindication
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ofimpairment.Ifanysuchindicationexiststhentheasset’srecoverableamountisestimated.Forgoodwillandintangibleassetsthathaveindefiniteusefullivesorthatarenotyetavailableforuse,therecoverableamountisestimatedeachyearatthesametime.
Therecoverableamountofanassetorcash-generatingunitisthegreaterofitsvalueinuseanditsfairvaluelesscoststosell.Inassessingvalueinuse,theestimatedfuturecashflowsarediscountedtotheirpresentvalueusingapre-taxdiscountratethatreflectscurrentmarketassessmentsofthetimevalueofmoneyandtherisksspecifictotheasset.
Forthepurposeofimpairmenttesting,assetsthatcannotbetestedindividuallyaregroupedtogetherintothesmallestgroupofassetsthatgeneratescashinflowsfromcontinuingusethatarelargelyindependentofthecashinflowsofotherassetsorgroupsofassets(the‘cash-generatingunit’or‘CGU’).Subjecttoanoperatingsegmentceilingtest,forthepurposesofgoodwillimpairmenttesting,CGUstowhichgoodwillhasbeenallocatedareaggregatedsothelevelatwhichimpairmentistestedreflectsthelowestlevelatwhichgoodwillismonitoredforinternalreportingpurposes.GoodwillacquiredinabusinesscombinationisallocatedtogroupsofCGUsthatareexpectedtobenefitfromthesynergiesofthecombination.
TheGroup’scorporateassetsdonotgenerateseparatecashinflows.Ifthereisanindicationthatacorporateassetmaybeimpaired,thentherecoverableamountisdeterminedfortheCGUtowhichthecorporateassetbelongs.
AnimpairmentlossisrecognisedifthecarryingamountofanassetoraCGUexceedsitsrecoverableamount.Impairmentlossesarerecognisedinprofitorloss.ImpairmentlossesrecognisedinrespectofCGUsareallocatedfirsttoreducethecarryingamountofanygoodwillallocatedtotheCGUandthentoreducethecarryingamountoftheotherassetsintheunit(groupofunits)onaproratabasis.Animpairmentlossinrespectofgoodwillisnotreversed.Inrespectofotherassets,impairmentlossesrecognisedinpriorperiodsareassessedateachreportingdateforanyindicationsthatthelosshasdecreasedornolongerexists.Animpairmentlossisreversediftherehasbeenachangeintheestimatesusedtodeterminetherecoverableamount.Animpairmentlossisreversedonlytotheextentthattheasset’scarryingamountdoesnotexceedthecarrying
amountthatwouldhavebeendetermined,netofdepreciationoramortisation,ifnoimpairmentlosshadbeenrecognised.
2.11.5 Income tax TheGroupissubjecttodirectandindirecttaxationinanumberofjurisdictionsinwhichitoperates.Sometransactionsandcalculationsforwhichataxchargeorassetiscomputedhaveaninherentuncertaintygiventhejudgementsinvolved.TheGroupobjectivelyestimatestheseamountsandanydifferenceinthefinaldeterminationwillimpacttheperiodinwhichsuchdeterminationismade.
2.12 Summary of other significant accounting policies
2.12.1 Foreign currencyThefinancialstatementsarepresentedinSterling,whichistheBank’sfunctionalandpresentationcurrency.Transactionsinforeigncurrenciesareinitiallyrecordedattherateofexchangerulingatthedateofthetransaction.Monetaryassetsandliabilitiesdenominatedinforeigncurrenciesareretranslatedintothefunctionalcurrencyattherateofexchangerulingatthebalancesheetdate.Non-monetaryassetsandliabilitiesaretranslatedintoSterlingattheeffectivehistoricalrateusedonthedateofinitialrecognition.Alldifferencesaretakentotheincomestatement.
2.12.2 Revenue recognition (a) Sukuk, murabaha and wakala income
and expense Sukuk,murabahaandwakalaareIslamicfinancingtransactions.Sukukarecertificatesofequalvaluerepresentingundividedsharesinownershipoftangibleassets,usufructandservicesor(intheownershipof)theassetsofparticularprojectsorspecialinvestmentactivities.Murabahaisacontractforsaleorpurchaseofgoodswherethereisanagreedmark-upanddeferredsettlement.Wakaladerivesincomeandexpenseintheformofagencyfeeorcommission.Incomeandexpenseforthesearrangementsarerecognisedonaneffectiveyieldbasisovertheperiodsofthecontracts.Thecalculationofincomeandexpenseincludeanyfeesandincrementalcoststhataredirectlyattributabletothefinancialinstrumentandareanintegralpartofthepurchaseorsale.
(b) Trading income Tradingincomeconsistsofrealisedprofitsandlossesonsukukandequitysecurities.
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(c) Fees and commission incomeFeesandcommissionswhicharenotrecognisedonaneffectiveyieldbasisoverthelifeofthefinancialinstrumenttowhichtheyrelate,suchasfeesfornegotiatingtransactionsforthirdpartiesandunderwritingfeesandcommission,arerecognisedinrevenuewhenitisprobablethattheeconomicbenefitwillflowtotheBank.Thiswillnormallybefromthepointatwhichtheacttowhichthefeesandcommissionsrelatehasbeencompleted.
2.12.3 Cash and cash equivalents ThecaptionsCash and cash equivalentsandCash and balances with banksrepresentcashandcurrentaccountbalanceswithbanksandclearingexchanges,allheldininterest-freeaccounts.
2.12.4 Financial instruments (a) Recognition of financial instruments
Financialinstrumentsarerecognisedinthebalancesheetonthetradedate,thatis,thedateonwhichtheBankcommitstobuyorsellthefinancialinstrument.Allfinancialinstrumentsarerecognisedinitiallyatfairvalue.Inthecaseoffinancialinstrumentsnotrecognisedatfairvaluethroughtheincomestatement,thatvaluewillincludedirectcostsofacquisitionorissue.Forfinancialinstrumentscarriedatfairvaluethroughtheincomestatement,transactioncostsareexpensedimmediately.
(b) Due from financial institutions, Financing arrangements, Due to financial institutions, Due to group entities and Due to customers FinancialassetsincludedwithinDue from financial institutionsandFinancing arrangements,aswellasfinancialliabilitiesincludedwithinDue to financial institutions,Due to group entitiesandDue to customerscomprisenon-derivativefinancialassetswithfixedordeterminablerepaymentsthatarenotquotedinanactivemarket.Theyarenotenteredintowiththeintentionofimmediateorshort-termresaleandarenotdesignedas‘availablefor-salesecurities’or‘financialassetsdesignatedatfairvalue’.Financialassetsincludedunderthesecaptionsareinitiallyrecognisedatfairvalueplusanydirectlyrelatedtransactioncosts.Theyaresubsequentlymeasuredatamortisedcostlessanyimpairmentlosses.Amortisedcostiscalculatedbytakingintoaccountanydiscountorpremiumonacquisitionandfeesandcoststhatareanintegralpartoftheeffective
rateofreturn.TheamortisationisincludedinIncome from financing and investingactivitiesandReturns to financialinstitutions and customersintheincomestatement.
AteachreportingdatetheBankreviewsthecarryingvaluesofitsfinancialassets;afinancialassetisconsideredtobeimpairedifthereisobjectiveevidenceofeventssinceinitialrecognitionoftheassetthatwilladverselyaffecttheamountortimingoffuturecashflowsfromtheasset.Theamountoftheimpairmentlosswillbethedifferencebetweenthecarryingvalueofthefinancialassetandthepresentvalueoftheestimatedfuturecashflows.Theamountoftheimpairmentlosswillberecognisedintheincomestatement,andthecarryingvalueofthefinancialassetwillbewrittendownandtheimpairmentlossallowancewillberecognisedinareserveforthatpurpose.Wheresubsequenteventsindicatethattheimpairmentlossallowanceisnotrequired,ornotrequiredinfull,thelossallowancemadewillbereversed.
(c) Available-for-sale securities Available-for-saleinvestmentsareinvestmentsthataredesignatedasavailable-for-saleorarenotclassifiedasanothercategoryoffinancialassets.Theseincludesukukandequity(quoted).Theintenttoholdthesecuritiesandtheilliquidnatureofthesukukmarketmakethedesignationasavailable-for-sale(‘AFS’)themostappropriate.TheBankdisposesofpositionsfromtimetotimetorebalancetheportfolio,toreduceexposurestoconcentrationrisk,orwhereitbelievesmarketconditionsmeritsuchasale.
AFSsecuritiesarerecognisedatcostatthepointofacquisition.Costbeingthefairvalueoftheinvestmentincludinganyacquisitioncharges.AFSsecuritiesarethencarriedinthebalancesheetatfairvalue.IncomeaccrualsonAFSsecuritiesarerecognisedintheincomestatement.ChangesinthefairvaluearerecogniseddirectlyinequityintheFair value reserveintheaccountingperiodinwhichtheyarise.Wherethevalueofasecurityisconsideredtobeimpaired,thelossesarerecognisedintheincomestatement;otherwise,thegainsandlossespreviouslyrecognisedinequityarerecognisedthroughtheincomestatementwhentheinvestmentmaturesorissold;
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theseareincludedunderTrading income.Fairvaluegainsandlossesarerecognisedinequitynetofanytaxeffect.
(d) Financial assets designated at fair value QuotedequityinvestmentsandPrivateequityinvestmentsthataremanagedandevaluatedonafairvaluebasisinaccordancewithanagreedinvestmentstrategyandreportedtokeypersonnelonthatbasisareclassifiedunderthiscategory.Theseassetsarerecognisedinitiallyatfairvalueandsubsequentgainsandlossesarisingfromchangesinthefairvaluearerecogniseddirectlyintheincomestatement.
Financialassetsclassifiedinthiscategoryaredesignatedbymanagementoninitialrecognitiongiventhatthefinancialassetsaremanagedandtheirperformanceisevaluatedonafairvaluebasis,inaccordancewithadocumentedriskmanagementorinvestmentstrategy.
(e) Foreign exchange commitmentsThevaluationofforwardforeignexchangecommitmentsheldatfairvaluethroughtheincomestatementisrecognisedinthebalancesheetunderFair value of foreign exchange agreementsoneithertheassetorliabilitysideofthebalancesheetdependentonwhetherthevaluationispositiveornegativerespectively.RevaluationgainsandlossesareincludedintheincomestatementunderForeign exchange gains and losses.
2.12.5 Investments in subsidiaries TheBank’sinvestmentsinsubsidiariesaredesignatedforrecognitionandmeasurementinthefinancialstatementsas‘fairvaluethroughincomestatement’.Accordinglytheseassetsarefairvaluedusingsuitablevaluationtechniquesandthegainorlossisincludedintheincomestatementoftheparententity.
2.12.6 Oil and gas properties - exploration and evaluation assetsAttheexplorationandevaluationstage,theGroupfollowsthesuccessfuleffortsmethodofaccountingforoilandnaturalgascosts.Accordinglyallcostsincurredarecapitalisedatinitialmeasurementandaresubsequentlyassessedforimpairment.Geologicalandgeophysicalcosts,includingseismicsurveysforexplorationpurposesareexpensedasincurred.
Mineralinterestsarecapitalisedasintangibleassetswhenacquired.Theseacquiredinterestsaretestedforimpairmentonaregularbasis,
property-by-property,basedontheresultsoftheexploratoryactivityandthemanagement’sevaluation.
Exploratorywellsaretestedforimpairmentonawell-by-wellbasisandaccountedforasfollows:
• CostsofexploratorywellswhichresultinprovenorprobablereservesaredeemedtohavedemonstratedthetechnicalfeasibilityandcommercialviabilityofextractingamineralresourceandaretreatedinaccordancewiththeGroup’saccountingpolicyforthetreatmentofdevelopmentoilandgasassets.Costsofdryexploratorywellsarechargedtoexpenseasincurred.
• Costsofexploratorywellsaretemporarilycapitaliseduntiladeterminationismadeastowhetherthewellwillresultinprovenorprobablereserves.Provenorprobablereservesarebelievedtohavebeendemonstratedifbothofthefollowingconditionsaremet:
- Thewellcanshowasufficientquantity ofreservestojustifyitscompletionasa producingwell,ifappropriate,assuming thattherequiredcapitalexpendituresare made.
- TheGroupcanmakeanddemonstratesufficientprogressassessingthereservesandtheeconomicandoperatingviabilityoftheproject.Thisprogressisevaluatedonthebasisofindicatorssuchaswhetheradditionalexploratoryworksareunderwayorfirmlyplanned(wells,seismicorsignificantstudies),whethercostsarebeingincurredfordevelopmentstudiesandwhethertheGroupiswaitingforgovernmentalorotherthird-partyauthorisationofaproposedproject,oravailabilityofcapacityonanexistingtransportorprocessingfacility.
Costsofexploratorywellsnotmeetingthese conditionsarechargedtoexpenseasincurred.
2.12.7 Plant and equipmentPlantandequipmentisstatedatcostlessaccumulateddepreciationandimpairmentlossesifany.Depreciationisprovidedonastraightlinebasisoverestimatedusefullivesasfollows:
Leaseholdimprovements 5yearsFixtures,fittingsandofficeequipment 5yearsComputerhardware 3years
ThisexcludesoilandgaspropertiesshowninNote31.
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2.12.8 Intangible assetsIntangibleassetsconsistofcomputerlicencesandsoftwaredevelopmentcostsincludingcapitalisedstaffcosts.Intangibleassetsarestatedatcostlessaccumulatedamortisationandimpairmentlossesifany.Amortisationisprovidedonastraightlinebasisoveracurrentestimatedusefullifeoffiveyears.
2.12.9 Operating leasesOperatingleaserentalsarechargedtotheincomestatementonastraightlinebasisovertheperiodofthelease.Thechargeinrespectofthepremisesisaftertakingintoaccounttherentfreeperiod.
2.12.10 Pension costTheBankoperatesadefinedcontributionpensionschemeforallstaff.ThecostoftheschemeisequaltothecontributionspayabletotheschemefortheaccountingperiodandisrecognisedwithinStaff costsintheincomestatement.TheBankhasnofurtherobligationoncethecontributionshavebeenpaid.
2.12.11 Share-based paymentsEIIBengagesinequitysettledsharebasedtransactionsinrespectofservicesreceivedfromcertainofitsemployees.Thefairvalueoftheservicesreceivedismeasuredbyreferencetothefairvalueofthesharesortheshareoptionsgrantedonthedateofthegrant.Thecostoftheemployeeservicesreceivedinrespectofthesharesorshareoptionsgrantedisrecognisedintheincomestatementwiththecorrespondingcredittothe‘sharebasedpaymentreserve’overtheperiodthattheservicesarereceived,whichisthevestingperiod.Twosharebasedpaymentschemeswereinoperationasat31December2010.
(a) Employee share incentive plan (ESIP) ESIPisdesignedtorewardtheemployeesfortheircurrentperformanceandisgenerallyincludedasapartoftheannualincentivepayment.Therewardmayincludeamatchingshareelementwithavestingperiodofmorethanoneaccountingperiod,subjecttotheemployee’scontinuingemploymentwithEIIB.Thesesharesarevaluedatthedateofthegrantandamortisedoverthevestingperiod.ThisschemeexpiredinJanuary2010.
(b) Employee share option plan (ESOP) Thevalueofoptionsgrantedunderthisschemearedeterminedusingoptionpricingmodels,whichtakesintoaccounttheexercise
priceoftheoption,thecurrentshareprice,theriskfreerateofreturn,theexpectedvolatilityofthesharepriceoverthelifeoftheoptionandotherrelevantfactors.
(c) Employee share incentive plan 2010(2010 ESIP) Thevalueofoptionsgrantedunderthisschemearedeterminedusingoptionpricingmodels,whichtakesintoaccounttheexercisepriceoftheoption,thecurrentshareprice,theriskfreerateofreturn,theexpectedvolatilityofthesharepriceoverthelifeoftheoptionandotherrelevantfactors.
2.12.12 Taxation Taxontheprofitorlossfortheyearcomprisescurrentanddeferredtax.Taxisrecognisedintheincomestatementexcepttotheextentthatitrelatestoitemsrecogniseddirectlyinshareholders’equity,inwhichcaseitisrecognisedinshareholders’equity.
(a) Current tax Currenttaxisprovidedontaxableprofitsat thecurrentrate.
(b) Deferred taxDeferredtaxisrecognisedontemporarydifferencesbetweenthecarryingamountofassetsandliabilitiesinthebalancesheetandtheamountattributedtosuchassetsandliabilitiesfortaxpurposes.Deferredtaxliabilitiesarerecognisedforalltaxabletemporarydifferencesanddeferredtaxassetsarerecognisedtotheextentitisprobablethatfuturetaxableprofitswillbeavailableagainstwhichdeductibletemporarydifferencescanbeutilised.
3. Segmental information
FollowingastrategicreviewoftheBank’sbusinessanewbusinessmodelwasimplementedduring2010.ThefuturedevelopmentoftheBankwillfocusonIslamicmarketsandcentreonthefollowingthreecorebusinesses.
(a) Banking-encompassingdeposittaking, provisionoffinancing,treasuryservices, structuredproductsandtradinginIslamicand Sharia’acompliantsecurities
(b)Investment Management-coveringquoted equities,privateequityandrealestate
(c)Financial Services-includingcorporatefinance,custody,trustandfundadministrationactivitiesandbusinessadvisory(activebusinessofthissegmentisyettocommence)
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ThesecorebusinesslinesaretheGroup’sstrategicbusinessunits(‘SBU’).EachSBUoffersdifferentproductsandservices,andismanagedseparatelybasedontheGroup’smanagementandinternalreportingstructure.SBUactivitiesaremonitoredbytheBank’smanagementcommitteesandtheBoardwhichisprovidedwithinternalmanagementreportsonamonthlybasis.
Informationregardingtheresultsofeachreportablesegmentisincludedbelow.PerformanceismeasuredbasedonsegmentprofitbeforetaxandisreviewedbyGroupexecutivemanagementandtheBoardofDirectors.Segmentresultsincludeitemsdirectlyattributabletoasegmentaswellasthosethatcanbeallocatedonareasonablebasis.
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2010 Investment Banking Management Total £ £ £
Revenuefromexternalcustomers 3,099,251 279,719 3,378,970Returnstoexternalcustomers (118,968) - (118,968)Fairvaluegainoninvestments - 1,729,139 1,729,139Operatingincome 2,980,283 2,008,858 4,989,141 Lossaftertax (2,303,464) (3,619,238) (5,922,702)Othercomprehensiveincomeaftertax (103,407) 13,536,502 13,433,095Totalcomprehensiveincome (2,406,871) 9,917,264 7,510,393
Depreciationandamortisation (280,815) (120,349) (401,164)
Segmentassets 123,285,893 58,255,792 181,541,685 Segmentliabilities 26,558,111 7,902,262 34,460,373
Capitalexpenditure Plantandequipment 98,676 42,290 140,966Intangibleassets 25,549 10,950 36,499
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2009 Discontinued Investment Banking Real Estate Management Total £ £ £ £
Revenuefromexternalcustomers 4,176,064 1,991,000 69,884 6,236,948Returnstoexternalcustomers (450,117) (1,779,000) - (2,229,117)CostsassociatedwithRealEstate - (212,000) - (212,000)Grosslossofoilandgasoperations - - (425,814) (425,814)Operatingincome 3,725,947 - (355,930) 3,370,017 Divisionallossbeforetax (13,851,082) - (8,952,999) (22,804,081)Unallocated (894,633)Operatinglossbeforetax (23,698,714) Fairvaluemovement - - (4,134,525) (4,134,525)Impairmentofassets (13,382,563) - (954,077) (14,336,640) (13,382,563) - (5,088,602) (18,471,165) Depreciationandamortisation (304,197) - (101,399) (405,596)
Segmentassets 158,162,900 - 8,815,480 166,978,380
Segmentliabilities 24,791,873 - 868,094 25,659,967
Capitalexpenditure Plantandequipment 11,490 - 4,388 15,878Intangibleassets 13,947 - 5,976 19,923
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2010 2009Group and Bank £ £
Duefromfinancialinstitutions-murabahaandwakala 575,716 1,376,022Financingarrangements-murabaha 926,972 1,184,794Available-for-saleinvestments-sukuk 478,677 1,214,095 1,981,365 3,774,911
4. Income from financing and investing activities
2010 2009Group and Bank £ £
Duetofinancialinstitutions-murabahaandwakala 101,546 365,959Duetocustomers-murabahaandwakala 17,422 84,158 118,968 450,117
5. Returns to financial institutions and customers
2010 2009Group and Bank £ £
Netlossesontranslationofbalancesdenominatedinforeigncurrency (294,156) (1,303,106)Netgainsontranslationofforwardforeignexchangeagreements 172,346 1,394,446 (121,810) 91,340
6. Foreign exchange (losses)/gains
2010 2009Group and Bank £ £
Quotedequity(securitiesavailable-for-saleanddesignatedatfairvalue) (231,894) 8,597Available-for-salesecurities-sukuk 1,239,696 301,216 1,007,802 309,813
7. Trading income
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2010 2009 £ £
Staff costs Directors’salaries,feesandother 857,794 951,068Directors’pensioncontributions(Note2.12.11) 19,341 37,330SharebasedpaymentstoDirectors(2010ESIP) 23,934 -IncentivepaymentstoDirectors 644,962 -Staffsalaries 2,428,873 2,602,974Staffpensioncontributions(Note2.12.11) 156,436 166,770Sharebasedpaymentstostaff** 112,204 82,240Incentivepaymentstostaff 2,627,296 200,055Socialsecuritycosts 372,951 411,986Sharia’aSupervisoryBoard(SSB)fees 79,500 77,177Recruitmentcosts 5,500 39,650Otherstaffcosts 141,770 140,472
7,470,561 4,709,722 Total of Directors’ emoluments 1,546,031 988,398 Amounts in respect of highest paid Director Emoluments 677,949 196,369Compensationforlossofoffice - 175,000Pensioncontributions - 16,150Sharebasedpayments(2010ESIP) 15,193 - 693,142 387,519 Numberofemployeesatyearend 35 34Averagenumberofemployees 35 35
8. Staff costs, Directors’ emoluments, number of employees and share based payments
8.1 Share based payments ** Employee share incentive plan (ESIP)
Apartofthe2007incentive(£112,000)wasdistributedduring2008with1,904,513equitysharesvestingintwoequalinstalments,inFebruary2009and2010.AnequalamountofmatchingshareswereofferedundertheplanvestinginFebruary2010.Theseshareswerevaluedatgrantprice(whichisthemarketvalueatthedateofgrant)andthematchingelementwasaccruedinthefinancialstatementsonatimeproportionbasis.TheschemewasfullyvestedinJanuary2010.Nocurrentyearchargeisrecognised(2009:£56,000).
** Employee share option plan (ESOP) AnequitysettledESOPschemewasintroducedinApril2008withtheaimofaligningtheinterestsofexecutiveswiththecreationofshareholdervalue.Thisisachievedbysettingcertaintargetsthathavetobeachievedfortheawardstovest.Theexercisepriceforthecurrentplansis7.7pandtheoptionsvestinMarch2011,2012and2013,athirdineachyearwithacontractuallifeof10yearsfromdateofgrant.Thenumberofsharessubjecttotheoptionsgrantedduring2008was3,116,844.TheoptionsarevaluedusingtheBlack-Scholesmodel.Nocurrentyearchargeisrecognisedastheamountschargedinpreviousyearscoverthetotalchargeadequately(2009:£26,240).
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** Employee share incentive plan 2010 (2010 ESIP) AnequitysettledESIPschemewasintroducedinApril2010withtheaimofaligningtheinterestsofallstaffwiththecreationofshareholdervalue.Thisisachievedbysettingcertaintargetsthathavetobeachievedfortheawardstovest.SubjecttoanappreciationofEIIB’sordinarysharepricebeyond4.5pencepershareandthemeetingofothervestingconditionsoneachofthethreevestingdatesof30November2010,2011and2012,the2010ESIPwillenablethebeneficiariestobenefitfromthegrowthinvalueofordinarysharesattributabletothem.Thisgrowthinvaluewillbesettledinshares(equitysettled).Totalnumberofsharesincludedintheplanis33.7million(seeNote29fordetails).
TheBankhasarrangedanindependentTrusttoadministerthe2010ESIPandESOPonbehalfofemployeesandhasprovidedfundstopurchaseapartofthecurrentshareobligation.
2010 2009 £ £
Legalandprofessionalfees 737,286 944,789Rentandotheroccupancycosts 723,435 502,186CommunicationsandITcosts 362,160 349,442Advertisingandmarketdevelopment 7,747 29,773Travel 286,724 203,990Consultancy 77,940 95,843BoardandSSBrelatedexpenses 129,993 133,578Otheroperatingcharges 268,616 397,932 2,593,901 2,657,533
This is stated after charging: 2010 2009 £ £
Auditofgroupfinancialstatementspursuanttolegislation FeespayabletotheGroup’sauditorfortheauditoftheGroup’sannualaccounts 165,000 165,000FeespayabletoassociatesoftheGroupauditorforotherservices: -TheauditoftheGroup’ssubsidiariesandbranchespursuanttolegislation 10,000 --Otherservicespursuanttolegislation(FSAaudit) 7,000 7,000 Rentalschargeunderoperatingleases 362,517 268,300
9. Other operating expenses
10. Operating loss before tax
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2010 2009 £ £
Tax on profit on ordinary activities charged in the income statement
Currenttaxfortheperiod - -Adjustmentstopriorperiodtax: -taxlossesof2008carrybackagainst2007profits - (986,580)-taxcreditsaccountedinequitytransferredtoincomestatement - (532,819)-otherprioryearadjustments (729,612) -Current tax income (729,612) (1,519,399) Deferredtaxfortheperiod - -Tax credit in the income statement (729,612) (1,519,399) Reconciliation of the total tax charge Lossbeforetax (6,652,314) (23,698,714) UKcorporationtaxatthestandardrate(28%) (1,862,648) (6,635,640)Expensesnotdeductiblefortaxpurposes 265,890 237,440Nontaxableincome (492,314) 597,722Differenttaxationrateinforeignjurisdictions (48,015) -Adjustmentstopriorperiodtax (729,612) (986,580)Deferredtaxassetnotrecognised** 2,137,087 5,267,659Tax credit (729,612) (1,519,399) Currenttaxfortheperiod - (986,580)Prioryear’staxreceivable - 30,607Currenttaxreceivableinthebalancesheet - (955,973) Tax on other comprehensive income Deferredtaxprovisiononoilandgasfairvaluereserve (7,288,886) -Deferred tax liability in the balance sheet (7,288,886) -
11. Taxation
**Deferredtaxassetsof£7.66m(2009:£4.77m)ontaxlossescarriedforwardof£27.3misnotrecognisedinthesefinancialstatementsgiventhecurrentlevelofuncertaintysurroundingtheBank’sfuturetaxableprofits.DeferredtaxassetontheUKtaxlossesarecomputedat28%.
Factors that may affect future current and total tax charge
Inthe2011budgeton23March2011,theUKgovernmentannounceditsintentiontoreducetheUKrateofcorporateincometaxfrom27%to26%witheffectfrom1April2012withfurtherreductionsof1%ineachyearuntilthestandardratewillbe23%in2015.TheUKcorporateratewasreducedto27%witheffectfrom1April2011andasat31December2010nofurtherchangesintheratehadbeensubstantivelyenacted.
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NotestotheFinancialStatementsat31December2010
2010 2009 ‘000 ‘000
Weightedaveragenumberofshares 1,747,589 1,822,280
12. Earnings per share
Basicearningspershareiscalculatedbydividingthelossfortheyearbytheweightedaveragenumberofordinarysharesoutstandingduringtheyear.Therearecurrentlynoinstrumentsinissuewhichwouldmateriallydiluteearningspershare.
TherearenoDue from financial institutionfacilitiesthatarepastdueorimpairedat31December2010and2009.
2010 2009Group and Bank £ £
Murabahaplacements 82,027,149 93,239,623Wakalaplacements 9,701,040 27,056,351 91,728,189 120,295,974
13. Due from financial institutions
Theimpairmentprovisionbalanceasat31December2009consistedofabroughtforwardbalancefrom2008of£3.75mandanimpairmentprovisionmadein2009of£6.35monafinancefacilityprovidedtoaMiddleEasternbasedcorporate.Nomovementstotheaccounthavebeenrecordedin2010exceptforaforeignexchangetranslationmovement.
2010 2009Group and Bank £ £
Murabaha Othercounterparties 21,725,304 21,351,575Impairmentprovision (10,475,304) (10,101,575) 11,250,000 11,250,000
14. Financing arrangements
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Theimpairmentprovisionof£7min2009wasraisedagainstasukukissuedbyamiddleeasterncorporate.During2010,upondisposalofthesecurity,£1mwasreversedandthebalanceof£6mwaswrittenoff.
Private equity investment represents the following:
(a)Group’sownershipof26.5%ofanAIM(London)listedcompanyintheUK.EIIBinitiallyacquired26.1%ofthiscompanyduring2008butdiluteditsholdingto22.7%in2009whenitdidnotparticipateinanewsharesissue.However,theGroup’sparticipationinnewshareissuesduringAprilandDecember2010increaseditsholdingtothecurrent26.5%.Afairvaluegaininrespectofthisinvestmentwasrecordedat£0.6m.
(b)Group’sinvestmentinpartnershipshares,thatrepresents6.5%ofaclosedinvestmentfund,specialisinginAsianprivateandpublicequities,atacostof£2.578m.Afairvaluegaininrespectofthefundwasrecordedat£1.1masat31December2010.
(c)Group’ssecondarymarketpurchaseof19.6%ofaprivateequitycompanythatinvestsinventuresspecialisingintheinformationandcommunicationstechnologyvaluechainintheArabworld.Fairvalueofthisinvestmentwasnotdifferenttoitsoriginalcost,asat31December2010.
2010 2009Group and Bank £ £
Sukuk Centralgovernments 5,749,467 3,349,602Financialinstitutions 4,879,290 5,323,535Othercounterparties 7,538,037 21,854,065Impairmentprovision - (7,030,988) 18,166,794 23,496,214
2010 2009Group £ £
Openingbookvalue 750,438 4,884,963Additions 11,856,949 -Fairvaluegain/(loss)duringtheyear 1,729,139 (4,134,525)Closingbookvalue 14,336,526 750,438
2010 2009Bank £ £
Openingbookvalue 750,438 4,884,963Additions 2,002,000 -Disposals(Note32.3) (2,752,438) -Fairvaluelossduringtheyear - (4,134,525)Closingbookvalue - 750,438
15. Available-for-sale securities - sukuk
16. Private equity financial assets designated at fair value
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NotestotheFinancialStatementsat31December2010
17. Fair value of foreign exchange agreements
Group and Bank Foreign exchange commitments used for Notional matching currency exposures Assets Liabilities amount £ £ £
2010Maturingin0-3months 36,437 373,810 56,421,627Maturingin3-6months - - - 36,437 373,810 56,421,6272009Maturingin0-3months 30,091 539,811 40,785,453Maturingin3-6months - - - 30,091 539,811 40,785,453
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Fixtures, Fittings and Leasehold office Computer Improvements equipment Hardware Total Group and Bank £ £ £ £
Cost At1January2010 291,789 162,703 180,570 635,062Additions 57,574 41,216 42,176 140,966Disposals (183,501) - (31,229) (214,730)At 31 December 2010 165,862 203,919 191,517 561,298 Depreciation At1January2010 174,048 104,653 165,300 444,001Chargefortheyear 60,638 35,251 14,939 110,828Disposals (154,750) - (31,229) (185,979)At 31 December 2010 79,936 139,904 149,010 368,850Net Book Value At 31 December 2010 85,926 64,015 42,507 192,448
Fixtures, Fittingsand Leasehold office Computer Improvements equipment Hardware TotalGroupandBank £ £ £ £
Cost At1January2009 291,789 162,614 164,781 619,184Additions - 89 15,789 15,878At31December2009 291,789 162,703 180,570 635,062 Depreciation At1January2009 115,690 72,125 138,262 326,077Chargefortheyear 58,358 32,528 27,038 117,924At31December2009 174,048 104,653 165,300 444,001NetBookValue At31December2009 117,741 58,050 15,270 191,061
NotestotheFinancialStatementsat31December2010
18. Plant and equipment
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2010 2009Group and Bank £ £
Cost At1January 1,456,266 1,436,343Additions 36,499 19,923At 31 December 1,492,765 1,456,266 Amortisation At1January 1,040,754 753,082Chargefortheyear 290,336 287,672At 31 December 1,331,090 1,040,754Net Book Value At 31 December 161,675 415,512
2010 2009 £ £
GroupAccruedincomereceivable 216,696 72,117Sundrydebtors 645,169 346,767Prepayments 332,464 653,478Oilandgasotherassets 757,459 675,109 1,951,788 1,747,471
Bank Accruedincomereceivable 216,696 72,117Sundrydebtors 645,169 346,767Prepayments 332,464 653,478 1,194,329 1,072,362
19. Intangible assets
20. Other assets
Intangibleassetsconsistofthecostsofcomputerlicencesandsoftwaredevelopmentincludingcapitalisedstaffcosts.
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2010 2009Group and Bank £ £
Commoditymurabahas 20,037,511 18,175,937Wakalaacceptances - 3,097,130 20,037,511 21,273,067
2010 2009Group and Bank £ £
Wakalaacceptances 1,021,055 1,009,533 1,021,055 1,009,533
21. Due to financial institutions
22. Due to customers
2010 2009 £ £
GroupAccruedexpenses 3,797,397 1,071,948Accruedreturnspayable 9,319 7,482Deferredincome 151,983 248,017SocialsecurityandPAYEpayable 93,650 110,212Sundrycreditors 1,073,386 750,633Oilandgasotherliabilities 613,376 649,264 5,739,111 2,837,556
Bank Accruedexpenses 3,797,397 1,071,948Accruedreturnspayable 9,319 7,482Deferredincome 151,983 248,017SocialsecurityandPAYEpayable 93,650 110,212Sundrycreditors 1,073,386 750,631 5,125,735 2,188,290
23. Other liabilities
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24. Maturity analysis of assets and liabilities
Thetablesbelowshowananalysisofassetsandliabilitiesanalysedbetweenthoseexpectedtoberecoveredorsettledwithinoraftermorethantwelvemonthsofthebalancesheetdate.
2010 Less than 12 More than 12 months months TotalGroup £ £ £
AssetsCashandbalanceswithbanks 5,440,264 - 5,440,264Duefromfinancialinstitutions 72,337,070 19,391,119 91,728,189Quotedequityinvestmentsdesignatedatfairvalue - 11,914,897 11,914,897Available-for-salesecurities-sukuk 7,258,742 10,908,052 18,166,794Financingarrangements - 11,250,000 11,250,000Privateequityfinancialassetsdesignatedatfairvalue - 14,336,526 14,336,526Fairvalueofforeignexchangeagreements 36,437 - 36,437Plantandequipment - 192,448 192,448Intangibleassets - 161,675 161,675Oilandgasproperties-tangible - 26,362,667 26,362,667Otherassets 1,951,788 - 1,951,788Total assets 87,024,301 94,517,384 181,541,685Liabilities Duetofinancialinstitutions 20,037,511 - 20,037,511Duetocustomers 1,021,055 - 1,021,055Fairvalueofforeignexchangeagreements 373,810 - 373,810Otherliabilities 5,590,789 148,322 5,739,111Deferredtaxliability - 7,288,886 7,288,886Total liabilities 27,023,165 7,437,208 34,460,373
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2009 Less than 12 More than 12 months months TotalGroup £ £ £
AssetsCashandbalanceswithbanks 685,495 - 685,495Duefromfinancialinstitutions 101,713,188 18,582,786 120,295,974Financingarrangements - 11,250,000 11,250,000Available-for-salesecurities-sukuk 8,652,787 14,843,427 23,496,214Available-for-salesecurities-equity - 127,817 127,817Privateequityfinancialassetsdesignatedatfairvalue - 750,438 750,438Fairvalueofforeignexchangeagreements 30,091 - 30,091Plantandequipment - 191,061 191,061Intangibleassets - 415,512 415,512Oilandgasproperties-intangible - 6,162,050 6,162,050Oilandgasproperties-tangible - 870,284 870,284Otherassets 1,747,471 - 1,747,471Currenttaxasset 955,973 - 955,973Total asset 113,785,005 53,193,375 166,978,380
Liabilities Duetofinancialinstitutions 21,273,067 - 21,273,067Duetocustomers 1,009,533 - 1,009,533Fairvalueofforeignexchangeagreements 539,811 - 539,811Otherliabilities 2,243,983 593,573 2,837,556Total liabilities 25,066,394 593,573 25,659,967
2010 Less than 12 More than 12 months months TotalBank £ £ £
AssetsCashandbalanceswithbanks 697,725 - 697,725Duefromfinancialinstitutions 72,337,070 19,391,119 91,728,189Quotedequityinvestmentsdesignatedatfairvalue - 549,623 549,623Available-for-salesecurities-sukuk 7,258,742 10,908,052 18,166,794Financingarrangements - 11,250,000 11,250,000Investmentsinsubsidiaries - 63,108,959 63,108,959Fairvalueofforeignexchangeagreements 36,437 - 36,437Plantandequipment - 192,448 192,448Intangibleassets - 161,675 161,675Otherassets 1,194,329 - 1,194,329Total assets 81,524,303 105,561,876 187,086,179
Liabilities Duetofinancialinstitutions 20,037,511 - 20,037,511Duetocustomers 1,021,055 - 1,021,055Duetogroupentities 17,451,998 - 17,451,998Fairvalueofforeignexchangeagreements 373,810 - 373,810Otherliabilities 5,090,779 34,956 5,125,735Total liabilities 43,975,153 34,956 44,010,109
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2009 Less than 12 More than 12 months months TotalBank £ £ £
AssetsCashandbalanceswithbanks 459,065 - 459,065Duefromfinancialinstitutions 101,713,188 18,582,786 120,295,974Financingarrangements - 11,250,000 11,250,000Available-for-salesecurities-sukuk 8,652,787 14,843,427 23,496,214Available-for-salesecurities-equity - 127,817 127,817Privateequityfinancialassetsdesignatedatfairvalue - 750,438 750,438Investmentsinsubsidiaries - 6,345,002 6,345,002Fairvalueofforeignexchangeagreements 30,091 - 30,091Plantandequipment - 191,061 191,061Intangibleassets - 415,512 415,512Otherassets 1,072,362 - 1,072,362Currenttaxasset 955,973 - 955,973Total assets 112,883,466 52,506,043 165,389,509
Liabilities Duetofinancialinstitutions 21,273,067 - 21,273,067Duetocustomers 1,009,533 - 1,009,533Fairvalueofforeignexchangeagreements 539,811 - 539,811Otherliabilities 1,594,717 593,573 2,188,290Total liabilities 24,417,128 593,573 25,010,701
25. Pension commitments
TheBankprovidesadefinedcontributionschemeforallstaff.TheassetsoftheschemeareheldseparatelyfromthoseoftheBankinindependentlyadministeredfunds.Totalcostsof2010and2009arefullysettledbyeachyearend.
26. Commitments under operating leases
ThereisacommitmentattheyearendunderanoperatingleasefortheBank’smainpremisesatMiltonGate,60ChiswellStreet,LondonEC1Y4SAforasevenyearperiodfrom21December2010to20December2017,atanannualrentandservicechargeof£279,150netofVATwithasixteenmonthrentfreeperiodoverthetotaltenorofthelease.TheBankhastheoptiontoexittheleaseonthethirdanniversary.Inaddition,thereisanagreementunderanoperatingleasefortheBank’spremisesinBahrainatanannualrentandservicechargeofBHD57,400(£98,414)foratwoyearperiodfrom1April2010to31March2012.Futurerentalsareasfollows:
2010 2009Group and Bank £ £
Withinoneyear 377,563 259,758Onetofiveyears 575,187 83,413Morethanfiveyears - - 952,750 343,171
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27. Contingent liabilities and commitments
Nocontingentliabilitiesorcontractuallyobligatorycommitmentsareoutstandingasatthebalancesheetdateanduptothedatethatthesefinancialstatementswereapproved,otherthantheoperatingleaseobligations(Note26).
29. Treasury shares
TheEIIBGeneralEmployeeBenefitTrust(the‘GEBT’)purchased£2.1mworthofsharesduringtheyearatanaveragepriceof4.45pinordertofacilitatetheestablishmentofthe2010employeeshareincentiveplan(the‘2010ESIP’).Thetotalvalueofthesesharesispresented,atcost,inequitywithinatreasurysharesreserveinaccordancewithIAS32.
The2010ESIPwillallowemployees(the‘Beneficiaries’)tobenefitfromthegrowthinEIIB’ssharepriceabove4.5pencepershareonthesharesattributabletothem.TheplaninvolvestheBeneficiariessubscribingtointerestsintheEIIB2010ESIPLimitedpartnership,whichisapartnershipbetweentheBeneficiariesandtheGEBT.
SubjecttoanappreciationofEIIB’sordinarysharepricebeyond4.5pencepershareandthemeetingofothervestingconditionsoneachofthethreevestingdatesof30November2010,2011and2012,the2010ESIPwillprovidetheBeneficiarieswiththegrowthinvalueofordinarysharesattributabletothem.Thisgrowthinvaluewillbesettledinshares(equitysettled).
The2010ESIPwasapprovedbytheBoardon5March2010andwaseffectivefrom5July2010.
28. Share capital, share premium and capital redemption reserve
Authorised £
5,000,000,000ordinarysharesof£0.01each 50,000,000
Capital Number Share Redemption Share of shares capital Reserve PremiumAllotted, called up and fully paid £ £ £
At 31 December 2010 1,765,658,553 17,656,585 599,040 116,219,800
At31December2009 1,765,658,553 17,656,585 599,040 116,219,800
InDecember2009,theBankconcludedacapitalreductionandtenderofferwherebyitcancelled59,903,978ofitsownshares.ThisinvolvedaCourtapprovedreductionoftheBank’ssharepremiumaccountamountingto£48,010,139andthetransferofthatamounttoaspecialreserve.ThespecialreservewasutilisedtofundtheshareredemptionandthebalancewasusedtoextinguishtheBank’snegativeretainedearnings.Thecapitalredemptionreservewascreatedtofacilitatethisexercise.
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30. Assets and liabilities in foreign currency
TheBankmanagesitsexposuretoforeignexchangeratefluctuationsbymatchingassetswithliabilitiesinthesamecurrencyasfaraspossible,withsimilarmaturitiesandtheuseofappropriateoff-balancesheetinstruments.
2010 2009Group £ £
Denominatedinsterling 85,720,853 110,402,613Denominatedincurrenciesotherthansterling 95,820,832 56,575,767Total assets 181,541,685 166,978,380 Denominatedinsterling 6,432,329 6,736,949Denominatedincurrenciesotherthansterling 28,028,044 18,923,018Total liabilities 34,460,373 25,659,967
2010 2009Bank £ £
Denominatedinsterling 80,511,835 110,402,613Denominatedincurrenciesotherthansterling 106,574,344 54,986,896Total assets 187,086,179 165,389,509 Denominatedinsterling 6,432,329 6,736,948Denominatedincurrenciesotherthansterling 37,577,780 18,273,753Total liabilities 44,010,109 25,010,701
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NotestotheFinancialStatementsat31December2010
Country Principal Activity Control % of registration
Subsidiaries EIIBInvestCoSPC Limitedpartner 100 BahrainEIIBServiceCoWLL Generalpartner 100 Bahrain
Sub-subsidiariesTriTechCapital Oilandgasexploration 91 BVITurathQuotedEquityFund Quotedequityfund 100 BVI
31. Investments in subsidiaries
TheBank’ssubsidiariesasat31December2010areasfollows:
2010 2009Investments in subsidiaries £ £
At1January 6,345,002 -
Additions 52,211,074 8,153,134Disposals(Note32.3) (7,204,911) -Fairvaluegain/(loss)duringtheyear 11,757,794 (1,808,132)At31December 63,108,959 6,345,002
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31.1 Oil and gas subsidiary EIIBGroupacquiredacontrollinginterestinanoilandgasexplorationventureon20March2009.Afinancingfacilitywasextendedtofacilitatetheacquisition.EIIBGroupobtainedcontroloverTriTechCapitalLtd(BVI)(‘TriTechCapital’)anditssubsidiaries(‘TriTechGroup’)viatheacquisitionofashareholdinginTriTechCapitalandenteringintoashareholders’agreementthatenablestheBanktoappointthemajorityofthedirectorstotheboardoftheTriTechGroupcompanies.ThetermsofthefinancingfacilityweresuchthatEIIBGroupeffectivelyborethesignificantrisksoftheinvestment,itincorporatedtherighttoconvertthefacilityintoequitysharesatanytimeasdeterminedbyEIIB.EIIB’sinterestinTriTechforconsolidationpurposeswasdeterminedbasedonitseffectiveinterestinthenetassetsoftheinvestee.
On21December2010,EIIBexerciseditsrightsandconvertedthefacilityintoequityandasat31December2010held91%oftheentity.
31.2 Oil and gas properties Oilandgasexplorationcostsarecapitalisedasintangibleassetsonacquisition.Thesearetestedforimpairmentonaregularbasis,basedontheresultsofexploratoryactivityandmanagement’sevaluationthereof.Noimpairmentallowanceshavebeenmadeagainsttheoilandgaspropertiesduringtheyear.
Followingasuccessfulexplorationandevaluationprocessandupondemonstrationoftechnicalfeasibilityandcommercialviability,oilandgasassetshavebeentreatedasdevelopmentassets.Thesewereassessedforimpairment,beforereclassification.IncompliancewithIFRS6,theGroupclassifyalloilandgas‘intangible’assets(e.g.exploratorylicence)as‘tangibles’atthepointoftransfertothe‘developmentasset’phase.
Onceatthedevelopmentstagetheoilandgasassetsaremeasuredatfairvaluesforsubsequentrecognition,withgainsandlossesrecognisedin‘othercomprehensiveincome’incompliancewithGroup’saccountingpolicy.
Furthertotheabovenon-controllinginterest(NCI)of9%,afurtherNCIiscreatedasaresultofanarrangementbetweentheTriTechGroupandateamofconsultantswhoareentitledto20%ofdistributionsafterthesettlementoftotalcapitalcontributedbytheowners.Thisarrangementhadnovaluein2009.The2010valueisaresultofthefairvaluegainonoilandgasdevelopmentassets.
The effective interest of EIIB and that of the Non-controlling interest:
Non- Amount % acquired EIIB controlling Date £ by EIIB cumulative % interest %
Initialdrawdownoffacility 20Mar09 5,756,838 82.58% 82.58% 17.42%Seconddrawdownoffacility 12May09 1,214,558 2.58% 85.16% 14.84%Thirddrawdownoffacility 11Jun09 1,062,739 1.70% 86.87% 13.13%Fourthdrawdownoffacility 21Apr10 671,584 0.84% 87.71% 12.29%Fifthdrawdownoffacility 11Aug10 168,056 0.19% 87.90% 12.10%Conversiontoequity 21Dec10 - 3.10% 91.00% 9.00%
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TheGroupengagedanindependentexperttoassessitsfuturenetreserves(‘incomeapproach’)ofitsoilandgasassetsasat31December2010,andtoevaluatethetechnicalfeasibilityandcommercialviabilityoftheseproperties.Basedonthisassessment,itwasdecidedthattheassetsshouldbeaccountedforasdevelopmentassetsasperEIIB’saccountingpolicy.
ThefuturenetreserveassessmentutilisestheSocietyofPetroleumEngineers-PetroleumResourcesManagementSystem(‘SPE-PRMS’)reservedefinitionsandNewYorkMercantileExchange(‘NYMEX’)oilandgaspricecurvesasonthevaluationdate(31December2010).Thesereservesareadjustedforrisksbasedonspecifictechnicalinformationonthespecificassetcategories.
Furthertotheabove,anassessmentofrecentarms-lengthtransactionsthatrepresentssimilaroilandgaspropertiesinthesameareawascarriedouttoevaluatethefairvalues.
Totalcostofthecurrentlyheldoilandgasdevelopmentassetsstoodat£5.5m.Thefairvaluegainof£20.8mandthedeferredtaxprovisionof£7.3mthereonarerecognisedintheothercomprehensiveincomeofthefinancialyear2010.
Thefollowingtableillustratesthenetquantitiesofoilandgasreserves,theexpectedfuturecashflowsdiscountedat10%andtheriskweightingsappliedtorecognisethevariousrisksassociatedwitheachcategoryofreserve.
2010 2009 £ £
Oil and gas development assets Tangibleoilandgasproperties 26,362,667 -
Oil and gas exploration and evaluation assets Unprovedintangiblemineralinterest - 6,161,899Unprovedproperty,plantandequipment - 870,435Total oil and gas properties 26,362,667 7,032,334
Proved Probable Possible Total
Net Reserves Oil/Condensate(thousandsofbarrels) 1,832 1,432 397 3,661Gas(millionsofcubicfeet) 2,212 1,718 476 4,406 Income data £ 000 £ 000 £ 000 £ 000Futuregrossrevenue 120,657 94,584 26,512 241,753Deductions (62,906) (50,304) (13,965) (127,175)Futurenetincome 57,751 44,280 12,547 114,578Discountedat10% 31,983 20,424 4,676 57,083Riskweighting 65% 25% 10%Riskweighteddiscountedfuturenetincome 20,789 5,106 468 26,363
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2010 2009 £ £
Short-termemployeebenefitsandothercashpayments 857,794 776,068Incentivepayment 644,962 -Terminationbenefits - 175,000Post-employmentpension 19,341 37,330Share-basedpayments 23,934 - 1,546,031 988,398
Pension Share Benefits contrib- based Total Total Salary Bonus in kind utions payments 2010 2009Executive £ £ £ £ £ £ £
SubhiBenkhadra 295,798 379,909 2,242 - 15,193 693,142 -KeithMcLeod 218,333 265,053 2,317 19,341 8,741 513,785 298,625 514,131 644,962 4,559 19,341 23,934 1,206,927 298,625
Fixed Attendance Total Total Fees fees 2010 2009Non-executive £ £ £ £
AdnanAhmedYousif(formerChairman) 35,000 4,500 39,500 39,500ShabirRanderee(Chairman) 40,000 6,000 46,000 46,000SalmanAbbasi 33,000 6,000 39,000 39,000YusefAbuKhadra 36,500 6,000 42,500 42,500MohammedAlSarhan 34,000 4,500 38,500 38,500YaserAlsharifi 14,365 3,000 17,365 -AabedAlZeera 36,500 6,000 42,500 42,500GeorgeMorton 37,500 20,300 57,800 43,577ZaherAl-Ajjawi 10,833 1,500 12,333 38,500SubhiBenkhadra 7,406 1,500 8,906 48,933 285,104 59,300 344,404 379,010
32. Related party disclosures
32.1 Compensation of key management personnel
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32.2 Other Directors’ interests TheBankentersintotransactions,arrangementsandagreementsinvolvingDirectorsandtheirrelatedconcernsintheordinarycourseofbusiness.Allsuchbusinessisconductedonanarms-lengthbasis.
Mr.AdnanYousiftheformerChairmanofEIIB(resignedon2February2011)isthePresidentandtheChiefExecutiveoftheAlBarakaGroupandMr.SubhiBenkhadratheCEOandDirectorisaDirectorofEsteradInvestmentCompanywithwhomEIIBhashadbusinessdealingsduring2010.
Totalreturnstorelatedparties(companiesandindividuals)were£23,470during2010(2009:£44,881).Thereisnoincomeearnedfromrelatedpartiesduringtheyear(2009:nil).Amountoutstandingasat31December2010was£16,159(2009:nil).ThiswassettledinJanuary2011.
32.3 Intra Group transactions TheBankprovideda£7.2mzeroprofitsharefinancingfacility(repayableondemand)toitswhollyownedsubsidiary,EIIBInvestCoSPCduringtheyear.EIIBInvestCoSPCusedtheproceedstoacquirethebeneficialownershipofTriTechCapitalfromEIIBplcinanarms-lengthtransactionforatotalconsiderationof£7.2m.
TheBankacquiredafurther257,920sharesofitsfullyownedsubsidiary,EIIBInvestCoSPCatparforacostof£43.4m(500sharesin2009at£164pershareforatotalcostof£82,156).
TheBanksolditsownershipinterestof26.5%inanAIMlisteddiamondminingcompanytoEIIBInvestCoSPCfor£2.8mduringtheyearinanarms-lengthtransaction.
33. Valuation of assets measured at fair value
TheGroup’saccountingpolicyonfairvaluemeasurementsisdiscussedinNote2.11.1.
TheGroupmeasuresfairvaluesusingthefollowingfairvaluehierarchythatreflectsthesignificanceoftheinputsusedinmakingthemeasurements:
Level 1: Quoted market price (unadjusted) in an active market for an identical instrument
Level 2: Valuation techniques based on observable inputs, either directly (i.e. as prices) or indirectly (i.e. derived from prices)
Thiscategoryincludesinstrumentsvaluedusing:quotedmarketpricesinactivemarketsforsimilarinstruments; quotedpricesforidenticalorsimilarinstrumentsinmarketsthatareconsideredlessthanactive;orother valuationtechniqueswhereallsignificantinputsaredirectlyorindirectlyobservablefrommarketdata.
Level 3: Valuation techniques using significant unobservable inputs
Thiscategoryincludesallinstrumentswherethevaluationtechniqueincludesinputsnotbasedonobservable dataandtheunobservableinputshaveasignificanteffectontheinstrument’svaluation.Thiscategoryincludes instrumentsthatarevaluedbasedonquotedpricesforsimilarinstrumentswheresignificantunobservable adjustmentsorassumptionsarerequiredtoreflectdifferencesbetweentheinstruments.
Fairvaluesoffinancialassetsandfinancialliabilitiesthataretradedinactivemarketsarebasedonquotedmarketpricesordealerpricequotations.ForallotherfinancialinstrumentstheGroupdeterminesfairvaluesusingvaluationtechniques.
Valuationtechniquesincludenetpresentvalueanddiscountedcashflowmodels,comparisontosimilarinstrumentsforwhichmarketobservablepricesexistandothervaluationmodels.Assumptionsandinputsusedinvaluationtechniquesincluderisk-freeandbenchmarkrateofreturns,creditspreadsandotherpremiausedinestimatingdiscountrates,bondandequityprices,foreigncurrencyexchangeratesandnetassetvaluations.Theobjectiveofvaluationtechniquesistoarriveatafairvaluedeterminationthatreflectsthepriceofthefinancialinstrumentatthereportingdatethatwouldhavebeendeterminedbymarketparticipantsactingatarm’slength.
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TheGrouphasanestablishedcontrolframeworkwithrespecttothemeasurementoffairvalues.ThisframeworkincludesindependentpriceverificationandreportingbytheGroup’sriskdepartmenttotheChiefExecutiveOfficer,andtheGroup’sRiskandAuditcommittees.TheRiskdepartmenthasoverallresponsibilityforindependentlyverifyingthetransactions,assetsandallsignificantfairvaluemeasurements.
Thetablebelowanalysesfinancialinstrumentsmeasuredatfairvalueattheendofthereportingperiod,bythelevelinthefairvaluehierarchyintowhichthefairvaluemeasurementiscategorised.
Group At 31 December 2010 Level 1 Level 2 Level 3 Total Assets £ £ £ £
Quotedequityinvestmentsdesignatedatfairvalue 11,914,897 - - 11,914,897Available-for-salesecurities-sukuk - 8,724,531 9,442,263 18,166,794Privateequityfinancialassetsdesignatedatfairvalue - - 14,336,526 14,336,526Oilandgasproperties - - 26,362,667 26,362,667Fairvalueofforeignexchangearrangements - 36,437 - 36,437 11,914,897 8,760,968 50,141,456 70,817,321
Liabilities Fairvalueofforeignexchangearrangements - 373,810 - 373,810 - 373,810 - 373,810
Bank At 31 December 2010 Level 1 Level 2 Level 3 Total Assets £ £ £ £
Quotedequityinvestmentsdesignatedatfairvalue 549,623 - - 549,623Available-for-salesecurities-sukuk - 8,724,531 9,442,263 18,166,794Investmentsinsubsidiaries - - 63,108,959 63,108,959Fairvalueofforeignexchangearrangements - 36,437 - 36,437 549,623 8,760,968 72,551,222 81,861,813
Liabilities Fairvalueofforeignexchangearrangements - 373,810 - 373,810 - 373,810 - 373,810
Group and Bank At 31 December 2009 Level 1 Level 2 Level 3 Total Assets £ £ £ £
Available-for-salesecurities-sukuk - 17,997,993 5,498,221 23,496,214Available-for-salesecurities-equity 127,817 - - 127,817Privateequityfinancialassetsdesignatedatfairvalue - - 750,438 750,438Investmentsinsubsidiaries* - 119,000 6,226,002 6,345,002Fairvalueofforeignexchangearrangements - 30,091 - 30,091 127,817 18,147,084 12,474,661 30,749,562
Liabilities Fairvalueofforeignexchangearrangements - 539,811 - 539,811 - 539,811 - 539,811
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ThefollowingtablereconcilestheopeningbalancestotheclosingbalancesforfairvaluemeasurementsinLevel3ofthefairvaluehierarchy.
* 2009 tables reflect the Bank only position. For the Group position the ‘Investments in subsidiaries’ should be removed.
Private equity Available- financial for-sale assets Group securities designated Oil and gas 2010 - sukuk at fair value properties Total
Balanceat1January 5,498,221 750,438 7,032,334 13,280,993Purchases - 11,856,949 - 11,856,949Totalgainsorlosses: 272,657 1,729,139 20,825,388 22,827,184
- in income statement - 1,729,139 - 1,729,139- in other comprehensive income 272,657 - 20,825,388 21,098,045
Transferfromlevel2 4,075,367 - - 4,075,367Settlementsandothermovements (403,982) - (1,495,055) (1,899,037)Balanceat31December 9,442,263 14,336,526 26,362,667 50,141,456
Private equity Available- financial for-sale assets Investments Bank securities designated in 2010 - sukuk at fair value subsidiaries Total
Balanceat1January 5,498,221 750,438 6,226,002 12,474,661Purchases - 2,002,000 52,211,074 54,213,074Totalgainsorlosses: 272,657 - 11,757,794 12,030,451
- in income statement - - 11,757,794 11,757,794- in other comprehensive income 272,657 - - 272,657
Transferfromlevel2 4,075,367 - 119,000 4,194,367Settlementsandothermovements (403,982) (2,752,438) (7,204,911) (10,361,331)Balanceat31December 9,442,263 - 63,108,959 72,551,222
Private equity Available- financial for-sale assets Investments Group and Bank securities designated in2009 - sukuk at fair value subsidiary * Total
Balanceat1January 6,406,735 4,884,963 - 11,291,698Purchases - - 8,034,134 8,034,134Totalgainsorlosses: (424,589) (4,134,525) (1,808,132) (6,367,246)
- in income statement - (4,134,525) (1,808,132) (5,942,657)- in other comprehensive income (424,589) - - (424,589)
Settlementsandothermovements (483,925) - - (483,925)Balanceat31December 5,498,221 750,438 6,226,002 12,474,661
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AlthoughtheGroupbelievesthatitsestimatesoffairvalueareappropriate,theuseofdifferentmethodologiesorassumptionscouldleadtodifferentmeasuresoffairvalue.ForfairvaluemeasurementsinLevel3,changingoneormoreoftheassumptionsused,toreasonablypossiblealternativeassumptionswouldhavethefollowingeffects:
Appropriatechangeforeachassetmeasurementbasedon:*Applicable%changetothemarketprice(3%-8%)**Applicable%changetothemarketprice(5%-20%)***2%changetodiscountrate****2%changeinbookvalue*****100%writedownofasubsidiary
Effect on profit or loss Effect on comprehensive income Favourable (Unfavourable) Favourable (Unfavourable) Group £ £ £ £
31 December 2010 Available-for-salesecurities-sukuk* - - 487,808 (487,808)Privateequityfinancialassetsdesignatedatfairvalue** 471,363 (471,363) - -Oilandgasproperties*** - - 3,473,454 (3,018,501) 471,363 (471,363) 3,961,262 (3,506,309)
Effect on profit or loss Effect on comprehensive income Favourable (Unfavourable) Favourable (Unfavourable) Group and Bank £ £ £ £
31 December 2009 Available-for-salesecurities-sukuk* - - 145,178 (145,178)Privateequityfinancialassetsdesignatedatfairvalue** 214,411 (214,411) - -Investmentsinsubsidiaries***** - (6,226,002) - - 214,411 (6,440,413) 145,178 (145,178)
Effect on profit or loss Effect on comprehensive income Favourable (Unfavourable) Favourable (Unfavourable) Bank £ £ £ £
31 December 2010 Available-for-salesecurities-sukuk* - - 487,808 (487,808)Investmentsinsubsidiaries**** 1,262,179 (1,262,179) - - 1,262,179 (1,262,179) 487,808 (487,808)
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34. Risk management
34.1 IntroductionTheBoardofDirectorshavesetanoverallriskframeworkinlinewithriskappetite,documentedwithinasetofriskmanagementpolicieswhichareapprovedbytheBoardormandatedriskcommittees.UltimateresponsibilityforriskresideswiththeBoardofDirectors.
TheBankisexposedmainlytocreditrisk,marketrisk,operationalriskandliquidityrisk.
(1) StructureTheBoardofDirectorsisultimatelyaccountableforriskwithintheBankandensuringastrongcontrolenvironment.TheBoardhasmandatedanumberofcommitteestaskedwithmanagingandmonitoringriskswithintheBank.
(a)Board of Directors TheBoardofDirectorsisresponsible fortheoverallriskmanagement approachandforapprovingtherisk appetite,tolerances,strategies andprinciples.
(b)Board Risk Committee TheBoardRiskCommittee(‘BRC’)is asub-committeeoftheBoardof DirectorswhichassiststheBoardin fulfillingitsriskmanagement responsibilitiesfromdaytoday. Thecommittee’sresponsibilities includedeterminingtheBank’srisk profile,ensuringthatexposures takenonbymanagementremain withintheBoarddeterminedrisk appetiteandassessing,reviewing, andapprovingallexposuresthatare withinitsdelegatedauthority.
(c) Risk Management Committee TheRiskManagementCommittee (‘RMC’)assiststheExecutive ManagementCommitteeandthe BoardofDirectorsinmanagingand controllingriskinallareasofthe Bank,throughproactiveidentification, measurement,control,monitoring, andreportingof:
• Creditrisk • Marketrisk • Operationalriskincluding
otherresidualrisks • Liquidityrisk
(d) Asset and Liability Committee TheAssetandLiabilityCommittee (‘ALCO’)isconstitutedtoassistthe ExecutiveManagementCommittee andtheBoardofDirectorsin proactivelymanagingthecapital, liquidity,assetsandliabilitiesofthe Bank.Itisalsomandatedtomanage theriskrewardrelationshipthatexists betweensolvency,liquidityandprofit raterisk.
(e) Internal Audit InternalAudit’sprimaryroleisto provideassurancetotheAudit CommitteeandtheBoardof Directorsthattheriskmanagement, internalcontrol,corporategovernance andotherkeybusinessprocesses andcontrols,asappropriate,are operatingeffectivelyandmeeting theongoingandchangingneeds oftheBank.Thisincludesproviding managementwithindependent appraisalsofsystemsofinternal controlandsupportingdevelopment ofasoundcontrolculturethroughout theBank.
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(2) Measurement and reporting TheriskswithintheBankareassessedusingquantitativeandqualitativemethodologies.LossesarecalculatedusingassumptionsbasedonconsiderationoftheeconomicenvironmentinwhichtheBankoperates,stressscenariosandconditionsintheIslamicbankingmarket.
Riskismanagedbyasetofcomprehensivelimits,triggersandprocesses.Thesereflectthebusinessstrategy,riskappetiteandmarketenvironmentinwhichtheBankoperatesanditsoverallriskcapacityinrelationtocapitalandregulatoryrequirementssetbytheUKFinancialServicesAuthority.
InformationiscompiledbytheriskdepartmentfromallbusinessareasandisthenpresentedtotheExecutiveManagementCommitteeandBoardofDirectorsonamonthlybasis.TheRiskReportincludesdetailedreportingofcreditexposuresbyinternalratings,geographicalregions,industrysectors,assetmaturities,liquidity,andmarketriskexposuresforforeignexchange,moneyandcapitalmarketinstruments.
Dailyreportsoncreditexposureandpositionriskarecompiledanddistributedbytheriskdepartmenttoseniormanagement.
(3) Risk mitigation Riskmitigantsareusedwherepossible.HowevertheBankcannotuseconventionalderivativeproductstomitigaterisk.ConsequentlyaspartofitsoverallriskmanagementframeworktheBankutilisesSharia’acompliantproductstohedgecurrencyriskandprofitraterisk.
(4) Concentration risk Concentrationriskariseswhenanumberofcounterpartiesareengagedinsimilarbusinessactivities,oractivitiesinthesamegeographicregions,orhavesimilareconomiccharacteristicsthatwouldcausetheirabilitytomeetcontractualobligationstobesimilarlyaffectedbyachangeineconomic,politicalorotherconditions.
InordertoavoidexcessiveconcentrationrisktheBankhasspecificguidelinesandlimitsinplacetorestrictGroup,Obligor,CountryandIndustrysectorexposures.
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34.2 Credit riskCreditriskistheriskthattheBank’scustomers,clientsorcounterpartieswillnotbeableorwillingtorepaycapitaland/orprofitorotherwisenotmeettheircontractualobligationsundercreditfacilitiesorinrespectofotheragreements.
TheBankhasarigorouscreditapprovalprocessforallcustomers,clientsandcounterpartiesandallareassignedaninternalriskrating.Exposuresaresubjecttoregularreview.
Exposures by asset class were: 2010 2010 2009 2009 Group Bank Group Bank £ £ £ £
Assets carried at amortised cost Cashandbalanceswithbanks 5,440,264 697,725 685,495 459,065Duefromfinancialinstitutions 91,800,673 91,800,673 120,355,650 120,355,650
- wakala 9,701,676 9,701,676 27,057,596 27,057,596- murabaha 82,098,997 82,098,997 93,298,054 93,298,054
Financingarrangements 11,289,279 11,289,279 11,287,178 11,287,178
Assets carried at fair value Available-for-salesecurities
-sukuk 18,271,924 18,271,924 23,567,314 23,567,314-equity - - 127,817 127,817
Investmentsinoilandgasassets 26,362,667 - 7,032,334 -
Fair value through income statement Quotedequityinstrumentsdesignatedatfairvalue 11,914,897 549,623 - -Privateequityfinancialassetsdesignatedatfairvalue 14,336,526 - 750,438 750,438Fairvalueofforeignexchangeagreements 36,437 36,437 30,091 30,091Investmentsinsubsidiaries - 63,108,959 - 6,345,002
Total credit exposure 179,452,667 185,754,620 163,836,317 162,922,555
(1) Exposure
NotestotheFinancialStatementsat31December2010
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Exposures by geographical region were 2010 2010 2009 2009 Group Bank Group Bank £ £ £ £
GCCcountries 74,108,268 129,279,065 82,603,660 82,603,660Bahrain 45,526,595 106,572,381 45,039,942 45,039,942 UAE 20,731,706 19,708,717 25,616,232 25,616,232 Kuwait 543,835 - - - Saudi Arabia 3,079,589 168 8,413,347 8,413,347 Qatar 4,226,543 2,997,799 3,534,139 3,534,139
MiddleEast(Other) 6,504,786 1,627,139 - -Africa 5,114,980 - 750,438 750,438Asia 10,808,227 3,000,234 2,000,745 2,000,745Australasia 178,827 - - -Europe 52,287,127 51,661,062 71,341,710 71,341,710USA 30,450,452 187,120 7,139,764 6,226,002Total credit exposure 179,452,667 185,754,620 163,836,317 162,922,555
Exposures by industry sector were 2010 2010 2009 2009 Group Bank Group Bank £ £ £ £
Financialservices 104,682,783 97,792,775 126,403,157 126,295,727GCC banks 53,609,565 53,609,565 64,121,671 64,121,671 Europe/Other banks 51,073,218 44,183,210 62,281,486 62,174,056
Otherfinancial 1,656,798 63,108,959 - -
Government 7,996,321 7,996,321 5,909,397 5,909,397Manufacturingandengineering 13,629,518 11,476,400 11,415,216 11,415,216Oilandgas 27,780,464 - 7,032,334 6,226,002Mining 5,938,973 - 750,438 750,438Realestate 6,763,632 5,380,165 12,325,775 12,325,775Food 2,826,403 - - -Agricultural 349,711 - - -Healthcare 279,769 - - -Informationandcommunicationtechnology 1,924,440 - - -Telecommunication 2,248,747 - - -Mediaandentertainment 2,584,229 - - -Other 790,879 - - -Total credit exposure 179,452,667 185,754,620 163,836,317 162,922,555
(2) Geographical regions
(3) Industry Sector
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(4) Credit quality Thecreditqualityofexposuresiscontinuouslymonitored.InternalcreditratingsaremappedtoECAIratingsincludingFitch,Moody’sandStandard&Poor’s.Thetablebelowshowsthecreditqualityoftheportfolioasat31December2010basedontheBank’sinternalriskratingsystem.
Investment Non-Investment Grade Grade Total £ £ £
2010 Group Cashandbalanceswithbanks 5,403,376 36,889 5,440,265Duefromfinancialinstitutions 58,009,560 33,791,113 91,800,673Quotedequityinvestmentsdesignatedatfairvalue - 11,914,896 11,914,896Available-for-salesecurities-sukuk 13,134,738 5,137,186 18,271,924Financingarrangements - 11,289,279 11,289,279Privateequityinvestmentsdesignatedatfairvalue - 14,336,526 14,336,526Investmentinoilandgasdevelopment/exploration - 26,362,667 26,362,667Fairvalueofforeignexchangeagreements 36,437 - 36,437Total credit exposure 76,584,111 102,868,556 179,452,667
2010 Bank Cashandbalanceswithbanks 660,836 36,889 697,725Duefromfinancialinstitutions 58,009,560 33,791,113 91,800,673Quotedequityinvestmentsdesignatedatfairvalue - 549,623 549,623Available-for-salesecurities-sukuk 13,134,738 5,137,186 18,271,924Financingarrangements - 11,289,279 11,289,279Investmentsinsubsidiaries - 63,108,959 63,108,959Fairvalueofforeignexchangeagreements 36,437 - 36,437Total credit exposure 71,841,571 113,913,049 185,754,620
NotestotheFinancialStatementsat31December2010
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(5) Aged analysis of past due and impaired financial assets Asat31December2010theGrouphasdecidedtomaintainthe25%impairmentallowance(£3.75m)itmadeduring2008and100%impairmentallowance(£6.73m)madein2009,bothonfinancingarrangements.Thefirstfacilityisclassifiedas‘Sub-standard’andthesecondas‘Loss’.Grossexposuresonthetwoassetsare£15mand£6.73m.Thefacilityfor£6.73misin-defaultsinceAugust2009.
Investment Non-Investment Grade Grade Total £ £ £
2009 Group Cashandbalanceswithbanks 685,495 - 685,495Privateequityinvestmentsdesignatedatfairvalue - 750,438 750,438Duefromfinancialinstitutions 85,379,403 34,976,247 120,355,650Financingarrangements - 11,287,178 11,287,178Available-for-salesecurities-sukuk 13,728,008 9,839,306 23,567,314Available-for-salesecurities-equity 127,817 - 127,817Investmentinoilandgasexploration - 7,032,334 7,032,334Fairvalueofforeignexchangeagreements 30,091 - 30,091Total credit exposure 99,950,814 63,885,503 163,836,317
2009 Bank Cashandbalanceswithbanks 459,065 - 459,065Privateequityinvestmentsdesignatedatfairvalue - 750,438 750,438Duefromfinancialinstitutions 85,379,403 34,976,247 120,355,650Financingarrangements - 11,287,178 11,287,178Available-for-salesecurities-sukuk 13,728,008 9,839,306 23,567,314Available-for-salesecurities-equity 127,817 - 127,817Investmentsinsubsidiaries - 6,345,002 6,345,002Fairvalueofforeignexchangeagreements 30,091 - 30,091Total credit exposure 99,724,384 63,198,171 162,922,555
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NotestotheFinancialStatementsat31December2010
34.3 Market risk TheBankhadnotradingportfolioduring2010(2009:Nil).Thecommentarybelowrelatestonon-tradingpositions.
34.3.1 Profit rate riskProfitrateriskarisesfromthepossibilitythatchangesintheprofitrateswillaffectfuturecashflows.TheBankmanagesprofitrateriskbyusingmaturitybucketstocalculatethenetprofitrategapwhilstconsideringvariable,fixedandnon-sensitiveratesofreturn.
2010 Profit Rate profile (£000) Rate profile bandGroup 0-1 2-3 4-6 7-12 1-5 Over 5 Assets Total month months months months years years
FixedRateItems 77,750 70,783 1,627 21 - 2,097 3,222VariableRateItems 43,626 54 22 3,244 4,075 34,047 2,184NonrateSensitive 58,077 5,427 36 - - - 52,614Total Assets 179,453 76,264 1,685 3,265 4,075 36,144 58,020
Liabilities FixedRateItems 21,058 20,037 1,021 - - - -VariableRateItems - - - - - - -NonrateSensitive - - - - - - -Total Liabilities 21,058 20,037 1,021 - - - -
Net Gap 56,227 664 3,265 4,075 36,144 58,020
Cumulative Gap 56,227 56,891 60,156 64,231 100,375 158,395
2010 Profit Rate profile (£000) Rate profile bandBank 0-1 2-3 4-6 7-12 1-5 Over 5 Assets Total month months months months years years
FixedRateItems 77,750 70,783 1,627 21 - 2,097 3,222VariableRateItems 43,626 54 22 3,244 4,075 34,047 2,184NonrateSensitive 64,379 684 36 - - - 63,659Total Assets 185,755 71,521 1,685 3,265 4,075 36,144 69,065
Liabilities FixedRateItems 38,510 37,489 1,021 - - - -VariableRateItems - - - - - - -NonrateSensitive - - - - - - -Total Liabilities 38,510 37,489 1,021 - - - -
Net Gap 34,032 664 3,265 4,075 36,144 69,065
Cumulative Gap 34,032 34,696 37,961 42,036 78,180 147,245
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2009 Profit Rate profile (£000) Rate profile bandGroup 0-1 2-3 4-6 7-12 1-5 Over 5 Assets Total month months months months years years
FixedRateItems 103,450 101,713 - - - 1,737 -VariableRateItems 51,591 18,556 14,594 18,441 - - -NonrateSensitive 8,795 1,012 - - - 7,783 -Total Assets 163,836 121,281 14,594 18,441 - 9,520 -
Liabilities FixedRateItems 22,283 21,273 1,010 - - - -VariableRateItems - - - - - - -NonrateSensitive - - - - - - -Total Liabilities 22,283 21,273 1,010 - - - -
Net Gap 100,008 13,584 18,441 - 9,520 -
Cumulative Gap 100,008 113,592 132,033 132,033 141,553 141,553
2009 Profit Rate profile (£000) Rate profile bandBank 0-1 2-3 4-6 7-12 1-5 Over 5 Assets Total month months months months years years
FixedRateItems 103,450 101,713 - - - 1,737 -VariableRateItems 51,591 18,556 14,594 18,441 - - -NonrateSensitive 7,882 906 - - - 6,976 -Total Assets 162,923 121,175 14,594 18,441 - 8,713 -
Liabilities FixedRateItems 22,283 21,273 1,010 - - - -VariableRateItems - - - - - - -NonrateSensitive - - - - - - -Total Liabilities 22,283 21,273 1,010 - - - -
Net Gap 99,902 13,584 18,441 - 8,713 -
Cumulative Gap 99,902 113,486 131,927 131,927 140,640 140,640
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Sensitivity to income Profitrateriskismanagedwithinprofitrategaplimitsonadailybasis.ThesensitivityoftheIncomeStatementtovariousprofitratescenariosareconsideredonadailybasis.AnanalysisoftheGroup’ssensitivitytoanincreaseordecreaseinmarketprofitrates,assumingnoasymmetricalmovementinyieldcurvesandaconstantfinancialposition,isasfollowsatthefinancialyearend:
Sensitivity to fair value of financial instruments WhiletheBankdoesnotholdortradeinprofitrateproducts,thefairvalueoffinancialinstrumentsheldbytheGroupwillbeaffectedbycurrentmarketforcesincludingprofitrates.Thetablebelowsetsoutthesensitivitytochangesinfairvaluesofrelatedinstrumentsassumingallotherfactorsremainconstant.
2010
2010
2009
2009
Group
Change in rates (Basispoints)
-100 bp -50 bp -25 bp +25 bp +50 bp +100 bp
Effectonincomestatement£000
-621 -504 -252 +263 +527 +1,055
Group and Bank
Change in rates (Basispoints)
-100 bp -50 bp -25 bp +25 bp +50 bp +100 bp
Effectonincomestatement£000
-1,336 -668 -334 +334 +668 +1,336
Group and Bank
Change in rates (Basispoints)
-100 bp -50 bp -25 bp +25 bp +50 bp +100 bp
Effectonfairvalue(equity)£000
+792 +396 +198 -198 -396 -792
Group and Bank
Change in rates (Basispoints)
-100 bp -50 bp -25 bp +25 bp +50 bp +100 bp
Effectonfairvalue(equity)£000
+63 +32 +16 -16 -31 -62
Bank
Change in rates (Basispoints)
-100 bp -50 bp -25 bp +25 bp +50 bp +100 bp
Effectonincomestatement£000
-596 -479 -240 +252 +503 +1,007
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2010
2009
Group and Bank
Change in currency rate % -10% -5% -2% +2% +5% +10%
Effectonincomestatement£000
-2,003 -1,002 -401 +401 +1,002 +2,003
Group and Bank
Change in currency rate % -10% -5% -2% +2% +5% +10%
Effectonincomestatement£000
-99 -49 -20 +20 +49 +99
34.3.2 Currency riskCurrencyriskistheriskoflossarisingfromchangesinforeignexchangerates.TheBoardhassetlimitsonopencurrencypositionsandthesepositionsaremonitoreddailytoensurepositionsaremaintainedwithintheestablishedlimits.
TheBankdoesnottakesignificantcurrencypositionsasallpositionsotherthanthefunctionalcurrencyaresubstantiallycovered.SmallresidualcurrencyexposuresremainwellwithintheBoardapprovedlimits.
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NotestotheFinancialStatementsat31December2010
2010
2009
Group
Change in price % -20% -10% -5% +5% +10% +20%
Effectonincomestatement£000
-2,383 -1,192 -595 +595 +1,192 +2,383
Group and Bank
Change in price % -20% -10% -5% +5% +10% +20%
Effectonincomestatement£000
-26 -13 -6 +6 +13 +26
Bank
Change in price % -20% -10% -5% +5% +10% +20%
Effectonincomestatement£000
-110 -55 -27 +27 +55 +110
34.3.3 Equities riskEquitiesriskistheriskoflossarisingfromchangesinequityprices.TheBoardhassettriggersonequitypositionsandthesepositionsaremonitoreddaily.
AnanalysisoftheGroup’ssensitivitytochangesinequitypricesatthefinancialyearendisasfollows:
34.3.4 Commodities riskCommoditiesriskistheriskoflossarisingfromchangesincommodityprices.Nocommoditieswereheldduring2010(2009:Nil).
34.4 Operational risk Operationalriskistheriskoflossarisingfrominadequateorfailedsystems,humanerrorandfraud,processesandexternalevents.Operationalriskscanresultindamagetoreputation,havelegalorregulatoryimplicationsorleadtofinancialloss.TheBankhasimplementedarobustcontrolframeworktosignificantlymitigatetheserisks.
Controlsincludeeffectivesegregationofduties,access,authorisationandreconciliationprocedures,staffeducationandassessmentprocesses,includingtheuseofinternalaudit.Riskmatriceshavebeendevelopedforeachdepartmentwhichformpartofaqualityself-assessmentprocess.
34.5 Liquidity risk LiquidityriskistheriskthattheBankwillbeunabletomeetitspaymentobligationswhentheyfalldue.TolimitthisrisktheBankmanagesthematuritiesofitsassetsandliabilitiesanditscashflowsonadailybasisandmaintainsaportfolioofshort-termbankdeposits.LiquidityriskmanagementistheresponsibilityofALCO.
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34.5.1 Liquidity profileLiquidityismanagedbasedoncontractualcashflows.TheGroupandBankhadthefollowingliquidityprofileswhichincludeforwardforeignexchangecommitments:
(Foreign currency amounts in sterling equivalents)
2010 Cash flow bandLiquidity profile (£000) 0-1 2-3 4-6 7-12 1-5 Over 5 Group Total month months months months years years
GBP Assets 140,823 124,309 36 52 - 11,250 5,176Liabilities 6,515 - 6,515 - - - -Net 134,308 124,309 (6,479) 52 - 11,250 5,176
USD Assets 76,425 4,066 1,649 3,204 4,075 24,015 39,416Liabilities 82,990 75,088 613 - - 7,289 -Net (6,565) (71,022) 1,036 3,204 4,075 16,726 39,416
Euro Assets 13 13 - - - - -Liabilities 1,735 1,735 - - - - -Net (1,722) (1,722) - - - - -
GCC currencies Assets 7,730 4,150 - 8 - 879 2,693Liabilities - - - - - - -Net 7,730 4,150 - 8 - 879 2,693
Middle East - other currencies Assets 7,168 98 - - - - 7,070Liabilities - - - - - - -Net 7,168 98 - - - - 7,070
Asian currencies Assets 2,319 34 - - - - 2,285Liabilities - - - - - - -Net 2,319 34 - - - - 2,285
Other currencies Assets 1,395 15 - - - - 1,380Liabilities - - - - - - -Net 1,395 15 - - - - 1,380
Total Assets 235,873 132,685 1,685 3,264 4,075 36,144 58,020Liabilities 91,240 76,823 7,128 - - 7,289 -Net 144,633 55,862 (5,443) 3,264 4,075 28,855 58,020
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2010 Cash flow bandLiquidity profile (£000) 0-1 2-3 4-6 7-12 1-5 Over 5 Bank Total month months months months years years
GBP Assets 135,614 124,276 36 52 - 11,250 -Liabilities 6,515 - 6,515 - - - -Net 129,099 124,276 (6,479) 52 - 11,250 -
USD Assets 38,795 259 1,649 3,204 4,075 24,015 5,593Liabilities 92,540 92,540 - - - - -Net (53,745) (92,281) 1,649 3,204 4,075 24,015 5,593
Euro Assets 13 13 - - - - -Liabilities 1,735 1,735 - - - - -Net (1,722) (1,722) - - - - -
GCC currencies Assets 67,745 3,386 - 8 - 879 63,472Liabilities - - - - - - -Net 67,745 3,386 - 8 - 879 63,472
Asian currencies Assets 9 9 - - - - -Liabilities - - - - - - -Net 9 9 - - - - -
Total Assets 242,176 127,943 1,685 3,264 4,075 36,144 69,065Liabilities 100,790 94,275 6,515 - - - -Net 141,386 33,668 (4,830) 3,264 4,075 36,144 69,065
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2009 Cash flow bandLiquidity profile (£000) 0-1 2-3 4-6 7-12 1-5 Over 5 Group Total month months months months years years
GBP Assets 151,187 136,545 1,956 30 - 11,906 750Liabilities 6,733 3,000 3,733 - - - -Net 144,454 133,545 (1,777) 30 - 11,906 750
USD Assets 55,618 6,387 6,018 - 1,048 31,864 10,301Liabilities 59,576 59,576 - - - - -Net (3,958) (53,189) 6,018 - 1,048 31,864 10,301
Euro Assets 12 12 - - - - -Liabilities - - - - - - -Net 12 12 - - - - -
GCC currencies Assets 1,054 16 - - - 791 247Liabilities - - - - - - -Net 1,054 16 - - - 791 247
Total Assets 207,871 142,960 7,974 30 1,048 44,561 11,298Liabilities 66,309 62,576 3,733 - - - -Net 141,562 80,384 4,241 30 1,048 44,561 11,298
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2009 Cash flow bandLiquidity profile (£000) 0-1 2-3 4-6 7-12 1-5 Over 5 Bank Total month months months months years years
GBP Assets 151,187 136,545 1,956 30 - 11,906 750Liabilities 6,733 3,000 3,733 - - - -Net 144,454 133,545 (1,777) 30 - 11,906 750
USD Assets 53,922 6,280 6,018 - 1,048 31,864 8,712Liabilities 59,576 59,576 - - - - -Net (5,654) (53,296) 6,018 - 1,048 31,864 8,712
Euro Assets 12 12 - - - - -Liabilities - - - - - - -Net 12 12 - - - - -
GCC currencies Assets 1,054 16 - - - 791 247Liabilities - - - - - - -Net 1,054 16 - - - 791 247
Total Assets 206,175 142,853 7,974 30 1,048 44,561 9,709Liabilities 66,309 62,576 3,733 - - - -Net 139,866 80,277 4,241 30 1,048 44,561 9,709
Asat31December2010andat31December2009,theBankhadnocontingentliabilitiesorothercommitmentsoutstandinginfinancialinstrumentsotherthanthoseincludedaboveorinNote17.
34.5.2 Liquidity ratiosTheBankmanagesitsliquiditywithintheprudentiallimitsof0%for8daysandunderand-5%for1monthandunder.Theratiosattheyearendwere:
8 days and under 1 month and under
31 December 2010 +19% +70%31December2009 +159% +361%
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NotestotheFinancialStatementsat31December2010
34.6 Capital management and risk TheGroup’sleadregulator,theFinancialServicesAuthority(‘FSA’)setsandmonitorscapitalrequirementsfortheGroup.TheGroupcomplieswiththeprovisionsoftheBaselIIframeworkinrespectofregulatorycapital.TocalculatecapitalrequirementstheGroupusesthe‘Standardisedapproach’forcreditrisk,‘Basicindicatorapproach’foroperationalriskandthe‘Standardisedapproach’formarketrisk.
TheGroup’scapitalrepresents‘Tier1’capitalandincludesordinarysharecapital,sharepremium,capitalredemptionreserve,retainedearnings,fairvaluereserveandforeignexchangereservesubjecttootherregulatoryadjustments.Allbankingoperationsarecategorisedas‘Bankingbook’businessandaccordinglytherisk-weightedassetsarecalculatedtoreflectthevaryinglevelsofrisksattachedtoassets.
TheGroup’sprimaryobjectiveandpolicyistomaintainastrongcapitalbasesoastomaintaininvestor,depositorandmarketconfidence.TheGrouphascompliedwithallregulatory(FSA)capitalrequirementsthroughouttheyear.
TheminimumrequiredregulatorycapitalunderBaselIIasat31December2010was£12.7m(£13.6min2009)comparedtotheavailablecapitalbaseof£79.6m(£132.9min2009).Thecurrentlevelofcapitalisconsideredtobeadequatetosupportfuturegrowth.
Capitalandrisk-rewardmanagementaretheresponsibilityofALCO,whichmonitorscapitalandrisklimitsforthevariousareasoftheBank’sbusiness.Currentlycapitalisnotaconstraintongrowth.
TheFSA’sapproachtoBaselIIcapitalmaintenancerequirementsisprimarilybasedonmonitoringtherelationshipoftheminimumRegulatoryCapitalRequirement(measuredas8%ofrisk-weightedassets)toavailablecapitalresources.TheFSAalsosetsIndividualCapitalGuidelines(ICG)foreachbank/bankinggroupthatsetscapitalrequirementsinexcessoftheminimumCapitalRequirement.AkeyinputtotheICGsettingprocessistheGroup’sInternalCapitalAdequacyAssessmentProcess(ICAAP).
Pillar3Disclosuresareavailableonthecompanywebsite.
35. Post balance sheet events
TheDirectorsconfirmtherearenosignificanteventsarisingsincethebalancesheetdatethatshouldbereportedtoshareholdersotherthantheexpiryon1February2011ofanoptionwhichathirdpartyheldtoacquire41%oftheequityofTriTech1LLC.
£000 £000 2010 2009
RegulatoryCapital 79,613 132,919
TotalRiskWeightedAssets 79,449 93,607 Credit Risk 48,932 57,277 Market Risk 12,713 15,021 Operational Risk 17,804 21,309
TotalCapitalRatio 100% 142%
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BankInformation
Registered No. 5328847
Directors
Shabir Randeree Chairman
Aabed Al Zeera Deputy Chairman
Salman Abbasi
Yusef Abu Khadra
Mohammed Al SarhanSenior Independent Director
Yaser Alsharifi
George Morton
Subhi BenkhadraChief Executive Officer
Keith McLeod Deputy Chief Executive Officer and Finance Director
Secretary
M A Mohaimin Chowdhury
Registered office
MiltonGate60ChiswellStreetLondonEC1Y4SA
Auditors
KPMGAuditplc15CanadaSquareLondonE145GL
Correspondent bankers
HSBCBankplc8CanadaSquareLondonE145HQ
BahrainIslamicBankP.O.Box5240ManamaKingdomofBahrain
Registrars
CapitaRegistrarsLimitedTheRegistry34BeckenhamRoadBeckenhamKentBR34TU
Nominated broker and advisor
ArbuthnotSecuritiesLtdArbuthnotHouse20RopemakerStreetLondonEC2Y9AR
Solicitors
BerwinLeightonPaisnerLLPAdelaideHouseLondonBridgeLondonEC4R9HA
Euro
pEan Islam
Ic In
vEstmEn
t Ban
k plcAnnual Report and Accounts 2010
Europe
Milton Gate 60 Chiswell Street London, EC1Y 4SA United Kingdom
Tel: +44 (0) 20 7847 9900 Fax: +44 (0) 20 7847 9901
middle East
Almoayyed Tower, 30th Floor Office 3002, P.O. Box 1660 Al Seef Area Kingdom of Bahrain
Tel: +973 17 501 234 Fax: +973 17 501 258
www.eiib.co.uk
registered office
Milton Gate60 Chiswell StreetLondon EC1Y 4SA
company registration no. 5328847
For your protection, telephone calls may be recorded. This document has been approved by EIIB, a company authorised and regulated by the Financial Services Authority.