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2 0 0 5ANNUAL REPORT

Board of Directors

General Management

Chairman’s Statement

Economy Outlook

Company Activities

Auditors Report

Consolidated Balance Sheet, December 31, 2005

Consolidated Statement of Income For the year ended December 31, 2005

Consolidated Statement of Changes in Shareholders Equity For the year ended December 31, 2005

Consolidated Statement of Cash Flows For the year ended December 31, 2005

Notes to Consolidated Financial Statements December 31, 2005

CONTENTS

2

BORD OF DIRECTORS

Bader Naser AlSubaieeChairman and Managing Director

Rasheed Al-Sayed Yousef Al-TabtabaeiDeputy Chairman

Jamal Abdullah Al-SaleemDirector

Hamad Ahmad Saleh Al-BusairiDirector

Dr. Ayed S. R. MannaDirector

Abdulwahab Saleh Al MuzainiDirector

Mazen M. MdawahDirector

Mishari Zaid Al-KhaledDirector

GENERAL MANAGEMENT

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2 0 0 5ANNUAL REPORT

GENERAL MANAGEMENT

Yousef E. Al-HassawiGeneral Manager

Adel J. Al MudafAssistant General Manager, Finance & Administration

Fahad Bader Al KuhailanAssistant General Manager, Trading & Treasury

Raed A. Al SalehAssistant General Manager, Asset Management

Wagdi Sayed EidFinancial Controller

Naser A. Al SalemLegal Affairs & Secretary of the Board

4

Chairman’s statement

Dear Shareholders,

It gives me great pleasure to present to you, on behalf of the Board of Directors, the Forty Second Annual Report of Kuwait Investment Company for the financial year that ended on December 31, 2005.

To begin with, we pray to the Al mighty God to have mercy upon our late Amir, His Highness Sheikh Jaber Al- Ahmed Al- Jaber Al- Sabah. With his departure, Kuwait lost a great leader who will always be remembered, with respect and affection, by the Kuwaitis, Arabs and Muslims.

While we express, on behalf of the Board, Management and staff, our deepest condolences to the Al- Sabah family, the government and the people of Kuwait, we would like to congratulate His Highness Sheikh Sabah Al-Ahmed Al- Jaber Al- Sabah on assuming the reigns of government as a successor to the late Amir. We are firmly confident thatH.H. Sheikh Sabah will be leading Kuwait and its people into the future with his insight and modern vision, enabling Kuwait to integrate with the international community and with the global economy.

The year 2005 has been exceptional for Kuwait. It was a year in which a number of positive factors have been dominating the economic scene, namely, the continuous rise in oil prices, coupled with Kuwait’s oil output reaching its maximum production capacity. These favorable conditions are expected to push the estimated surplus of the general budget for the current fiscal year (2005/2006), up to around KD 6.7 billion. These estimates are based onthe assumption that the current oil prices and volume of production would last till the end of this fiscal year.

Relevant in this regard is that the Government of Kuwait has to cope with the critical challenges posed by a number of economic and social factors. For instance, neither the currently rising oil prices, nor the stability of oil production circumstances can be guaranteed. Furthermore, the population growth rate of the Kuwaiti young society requires more job opportunities to be created for an increasing number of Kuwaiti youth searching for jobs in the labor market. On another front, the Kuwaiti Government has to meet the requirements of the overall economic, social, educational and health development. All of these factors jointly dictate the use of the budget surplus in productive economic activities conducive to sustainable development. A portion thereof must also be applied to strengthen the reserves of the Future Generations’ Fund.

During 2005, Kuwait Investment Company (KIC) continued its leading role in the Kuwaiti financial sector, postingnumerous qualitative and quantitative accomplishments that enriched its track record of success since its inception. These successes ultimately reflected on KIC’s financial performance that reached its highest levels ever this year.

Established in Kuwaiti in 1961, KIC stands as the first Kuwaiti investment company, enjoying the benefits of thisexclusive privilege. Since its incorporation, the Company has been coping with, and taking part in, the comprehensive urban, economic and social development Kuwait has been staging over the past forty five years. Over the years,KIC remained a pioneer national company with evident contribution to the success and development of the financialsector in the country, manifesting a leading role in the evolution of the investment industry. Throughout the past period, KIC has retained its innovative business approach, launching the latest financial and investment productsand services that respond to the ever evolving and changing needs of a steadily growing clients base.

KIC continued to implement its core business strategy by expanding its fee generating activities. Within this context, KIC acted as the listing advisor for Kuwait National Real Estate Services & Investments Company, which was listed on the Kuwait Stock Exchange during the first quarter of the year. KIC also established Al-Masar LeasingCompany with a capital of KD 15 million, and successfully marketed the shares of this new company to its clients. On a regional level, KIC attracted a number of GCC investors and established for their account investment portfolios at the Kuwait Stock Exchange. In parallel to this move, KIC designed and structured investment portfolios in its name at a number of GCC stock markets, with a view to trading shares for the account of some of its customers. On the same track of income-generating business, KIC enhanced the performance of its financial intermediation

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2 0 0 5ANNUAL REPORT

Chairman’s statement

Bader Naser AlSubaiee

Chairman & Managing Director

office at Kuwait Stock Exchange, and established a branch for this office on the grounds of Kuwait International FairCompany. In furtherance of this activity, KIC also established the Arab Financial Services Holding Company, and acted as the lead manager for the subscription to BCC Investment Company WLL-Bahrain (a cement company in Bahrain).

With an eye on furthering its existing strategic alliances, KIC cooperated with Gulf Investment House as the main advisor in marketing US$ 165 million in Kuwait out of the US$ 520 million capital of Gulf Energy City Company (Holding)-Qatar. Since the building of more strategic alliances remains one of the areas of focus for KIC, the Company is in the process of establishing with strategic Saudi and Bahraini partners a financial intermediation company in theSaudi stock market.

KIC also maintained its policy of participating in the establishment of new cross-border companies through alliances with local and regional companies. Its first step on this front was in Bahrain, then in Qatar and subsequently in Iranand Central Asia. These expansionary moves were aimed at tapping those markets and leveraging the investment opportunities therein as they arise.

It is with great satisfaction that I announce the excellent results KIC has posted this year. Net profit has surged toKD 53.087 million, compared to KD 20.058 million for 2004. Earning per share also leapt to 106.17 fils for 2005compared with 40.12 fils for 2004. Return on shareholders equity remarkably rose to 44.52% against 20.12% forthe previous year, while the return on total assets almost doubled and reached 17.36% against 8.77% for 2004. Shareholders equity significantly rose to KD 172.318 million compared to KD 119.740 million for the previous year.

In view of these excellent results, KIC’s Board of Directors has recommended the distribution of cash dividends of 60% of the share nominal value, or 60 fils per share, at the shareholders annual general meeting.

KIC’s Board of Directors look at the years ahead with full confidence and optimism. We trust that the strength of theKuwaiti economy would offer promising future growth potentials. Capitalizing on the talents, skills and competencies of its Management and staff, KIC will seek to leverage those future opportunities, maximizing value and generating optimal returns for the shareholders. In its quest for achieving these strategic objectives, KIC will maintain its policy of expanding the scope of its activities, with special focus on fee generation. The Company also remains committed to furthering its regional presence. To this end, KIC will endeavor to enhance its cooperation with local and regional strategic partners in establishing affiliates that serve the interests of KIC, and to expand its regional network offinancial intermediation offices. While launching more innovated financial products that meet the market demands,the Company will seek to exploit the boom periods at the Kuwait Stock Exchange, tailoring and launching more local investment funds that suit the investment objectives of the different segments of investors.

In conclusion, I would like to extend, on behalf of the Members of the Board of Directors and myself, heartfelt gratitude and appreciation to His Highness the Amir of Kuwait, Sheikh Sabah Al-Ahmad Al-Jaber Al-Sabah, His Highness the Crown Prince, Sheikh Nawaf Al-Ahmad Al-Jaber Al-Sabah, and His Highness the Prime Minister Sheikh Naser Al-Mohammed Al-Ahmed Al-Sabah, May God Guard them, for their kind attention and continuous support to the investment sector in the country.

We would like to extend our deep gratitude, as well, to His Excellency the Minister of Finance and Chairman of Kuwait Investment Authority, His Excellency the Governor of the Central Bank of Kuwait, and the Managing Director of Kuwait Investment Authority, for their constant support to us. Our special thanks are also due to our valued clients and shareholders for their confidence and support, as well as our employees who valuably contributed to theachievements made during the year.

6

Economy Outlook

Government General Budget

Kuwaiti Dinar per US DollarJan 1992 to Dec 2005

Official figures released by theMinistry of Finance indicate that the Kuwait’s average oil price for the first nine months (April-De-cember) of the current fiscal year2005/2006 (which began in April 1 2005 and ends on March 31, 2006), increased to around US$ 50.4 per barrel, up by 140% over the US$ 21 per barrel price as-sumed in the current budget.

Although Kuwait’s official OPECproduction quota during the firstnine months of the current fiscalyear was around 2.234 million barrels/day, up by 11.7% over the budgeted quota, its actual produc-tion during the mentioned period was higher, standing at around 2.5 million barrels/day. According to the follow-up report for the State’s

financial accounts (November2005), the total revenues received until 30.11.2005 scored around KD 8.702 billion.

Assuming that that current levels of oil prices and production will continue for the remaining part of the current fiscal year, Kuwait isexpected to receive oil revenues of around KD 12.8 billion for the entire fiscal year 2005/2006, upby around KD 8.9 billion over the budgeted revenues. Adding KD 0.7 billion for non-oil revenues, total public revenues may reach around KD 13.5 billion against the budget expenditure alloca-tions of around KD 7.232 billion, meaning that the general budget may post an assumed surplus of around 6.27 billion, if the prices

and production levels remain un-

changed till the end of the current

fiscal year.

Total public debt as at the end of October 2005 was KD 2,874 million, declining by 5.2% below 2004 level, although the decline was mainly in the balance of low cost difficult debt bonds. The pub-lic debt is comprised of long-term treasury bonds with a balance of KD 2,430 million (compared to KD 1,339 million by the end of 2004), treasury bills with a zero balance (compared to KD 1,088 million by the end of 2004), and the dif-ficult debt bonds with a balance ofKD 444 million (compared to KD 603.7 million by the end of 2004), down from KD 5,500 million at the issuance of these bonds in 1992, thus standing at around 8.1% of their original balance on issuance date.

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2 0 0 5ANNUAL REPORT

Economy Outlook

Monetary Policy

Performance of Kuwaiti Dinar Against GBP, EURO and JPY 2005

Highlighting the Central Bank of Ku-wait’s endeavor to ensure the conform-ity of KD interest rates with the trends of the US dollar to which it is pegged, the Central Bank of Kuwait raised the discount rate to 6% in November 2, 2005, which was the fifth consecutiveincrement to the discount rate, totaling 125 basis points with 25 basis points each, in February, March, July, Octo-ber and November 2005. The latest increase followed the US Federal Re-serve raising its discount rate by 25 ba-sis points to 5%.

However, the rising interest rates since December 2004 have not been able to douse liquidity to a great extent. Money supply, as measured by M2, has been growing at a very high rate. The mon-ey supply expanded by 9.7% over the first ten months of 2005, as comparedto 12.1% growth rate for the whole of 2004. In terms of year-on-year growth, M2 at the end of October 2005 was

13.6% higher than the corresponding period in the previous year. Continued improvement in liquidity despite the in-crease in interest rates is a testimony of the robust demand in the economy. In addition, banks remained on a lending spree, as the demand for loans in the private sector, a key yardstick for mon-ey supply growth, continued to pick up.

Claims on the private sector expanded by 12.6% till the end of October 2005, led by 13.4% year-to-date rise in credit facilities to residents which stood at around KD 11.186 billion (representing about 54.4% of the local banks total as-sets), posting a growth of 13.4% or KD 1.319 billion compared to the KD 9.867 billion for 2004. It seems that the con-cern over the high growth rate of credit facilities and the inflated domestic as-set prices, both financial and real es-tate, were behind the Central Bank of Kuwait’s contracting monetary policy by increasing the cost of funds (inter-est rates), and putting a maximum ceil-

ing for banks’ lending that does not exceed 80% of each bank’s size of deposits.

Excellent economic growth in

Kuwait was accompanied with

a marked increase in inflation.

Measured by the growth of Con-

sumer Price Index, inflation in-

creased to 3.92% in the first half

of 2005 from an extremely low

level of 0.89% in 2002. Overall

inflation for 2005 is set to exceed

the previous high of 3.1% in 1999

and almost equal the 3.6% price

increase in 1996. The main factors

which led to an increase in overall

inflation were the price increases

of some segments of consumer

products, which increased during

the first six months of 2005 at a

rate ranging between 8%, 7.8%

and 3.2%, depending on the type

of the product segment.

8

Economy Outlook

Kuwait Stock Exchange

Performance of Kuwait Stock Market Volume vs, Market index For the year 2005

The positive macro economic news flows, coupled with high oil prices andsuperior performance of the Kuwaiti companies have led to an improved market sentiment, in turn helping to re-gain the confidence of investors. Mostof the months of the year witnessed positive upward trends, with the stock market rising by78.56% at the end of 2005, compared to its growth rate of 33.80% for 2004.

Kuwait Stock Exchange Index closed the year at 11,445.1 points as at the end of Wednesday, 28.12.2005, up by 5,035.6 points from the previous closing registered on 29.12.2004. The Weighted Index of the market reached 562.24 points, up by 226.38 points from the closing level of 2004.

Trading activity during the year posted a marked increase. Volume of traded shares increased to 52,246,314,500 shares, up by 55.7%, with a total value of KD 28,422,120,095 an increase of 86%. This value was distributed over 1, 955, 650 transactions, which repre-sents an increase of 84.9% compared to the end of 2004. Market capitaliza-tion for KSE listed companies stood at

KD 30,396,219,000. The listing of 35 new companies during the year added to the depth and base of the market.

The number of traded companies stood at 162, of which the share prices of 114 companies increased, while the share prices of 48 companies decreased. The average daily trading volume amounted to 210,670,623 shares with a total value of KD 114, 605, 323, distributed over 7,886 transactions.

The positive performance of the market during the year, particularly during the last few months, provided welcome re-assurance that the capital market should remain in good health, despite the lat-est rate hikes. Kuwait’s market ranked the second among the regional financialmarkets that have produced excep-tional gains. According to National Bank of Abu Dhabi Index, the Saudi market ranked the first, running up by 103.65%,followed by the Kuwaiti market, up by 78.56%, then the Qatari market at 70.21%, UAE market at 69.43%, while Bahrain and Oman markets came last, appreciating by 44.44% and 23,13%, re-spectively.

In contrast to the previous year, all Ku-

wait market sectors showed a posi-tive performance as at the end of 2005 and posted impressive growth rates, with the insurance sector ex-periencing the lowest growth rate of 25.04%, while the investment sec-tor came at the forefront of the sec-tor gainers advancing by 127.79% during the year, higher by 28.49% compared to 2004. The largest of all sectors, banking sector, too final-ly attracted the interest of investors after a period of under-valuation, to record a gain of 61.69% at the end of the year.

With the macro economic scenario

being positive, and with the Kuwaiti

stocks remaining undervalued com-

pared to their regional counterparts,

circumstances are promising further

gains in the Kuwaiti stock market,

with the average Price/ Earnings

ratio (P/E) of the Kuwaiti market at

14.2 times, which is viewed as one

of the lowest among GCC countries.

Thus, it is expected that KSE index

is likely to break the 12,000 point

benchmark, or even to go higher, in

the short term.

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2 0 0 5ANNUAL REPORT

Company Activities

Operations Review

The joint efforts of KIC’s different divi-

sions contributed to the excellent op-

erating results posted by the Company

during 2005. This outstanding perfor-

mance was driven by the favorable

economic environment that prevailed

in Kuwait and the Gulf region during

the year, and which stemmed from

the rise of oil prices to record levels,

with its consequent positive reflections

on the enhanced economic growth in

the GCC countries, coupled with the

improved security conditions and the

geopolitical stability in the region, es-

pecially in Kuwait.

The following is a brief review of the

most significant achievements of the

Company during the year:

Asset Management Division :

The Asset Management Division main-

tained its instrumental role in enhanc-

ing the overall profitability of the com-

pany, impressively increasing fees and

commissions income, which represent

the major source of revenues for KIC.

Local & GCC Investments De-partment :

The year 2005 was a year of numer-

ous accomplishments for Local & GCC

Investments Department. During the

year, the department successfully per-

formed the following tasks:

Carrying out the feasibility study for

the Arab Financial Services Com-

pany. Based on this study, the com-

pany was actually incorporated dur-

ing the year.

Initiating discussions with the Ku-

wait Stock Exchange to facilitate

the introduction of a stock lending

operation.

Appraisal of the performance of

KIC’s brokerage office.

Acting as the advisor for listing

Kuwait National Real Estate Ser-

vices & Investments Company.

With the department successfully

completing the listing requirements,

the company was listed on Kuwait

Stock Exchange during the first

quarter of 2005.

Consulting with strategic partners

in the Kingdom of Saudi Arabia and

the Kingdom of Bahrain on the fea-

sibility of establishing a brokerage

company with the scope of services

covering the Saudi financial mar-

ket.

Consistent with its policy of enhancing

its regional presence through equity

participations in companies outside

Kuwait, KIC leveraged its extensive

network of strong relations with lo-

cal and regional allies to establish its

footprints first in Bahrain then in Qa-

tar. Subsequently, KIC extended its

activities to Iran, seeking to exploit the

investment opportunities in this mar-

ket as they arise. During 2005, KIC

undertook the following initiatives on

this front :

In liaison with Gulf Investment

House as a lead financial advisor,

KIC successfully marketed in Kuwait

an amount of USD 165 million out of

the USD 520 million capital of Gulf

Energy Company (Holding). This is

a tax-exempted entity established

in the Cayman Islands for the pur-

pose of acquiring a stake of 82.92%

in Gulf Energy City Company (Hold-

ing)-Qatar. KIC retained for itself an

equity stake of 10% in Gulf Energy

Company (Holding). The projected

cash return on this investment is es-

timated at around 24% p.a., or 35%

for the 18-month expected term of

the investment.

The rationale underlying the estab-

lishment of Gulf Energy Company

(Holding) is the expectations that

Gulf Energy City Company (Hold-

ing)-Qatar will be a dynamic center

for attracting international and re-

gional energy companies, as well as

a regional center for commercially

promoting hydrocarbon resources.

This city will be constructed on a

total area of around 721,584 square

meters, enjoying a strategic loca-

tion within the Lucel mega project

that occupies a vast area of around

35 square kilometers to the north of

Doha City.

The establishment of the Kuwaiti

– Iranian Holding Company during

the year was for the purpose of en-

gaging in medium to long term Is-

lamic Shari’a-compliant investments

in Iran and the neighboring countries

(Central Asia). This move was aimed

10

at furthering the regional growth of

KIC and targeting high returns for

the shareholders. The investment

rationale lies in KIC’s belief that the

Iranian market offers promising in-

vestment opportunities in terms of

both growth and profitability poten-

tials. This viewpoint finds support in

the fact that Iran ranks the second

in the Middle East in terms of popu-

lation size, and the second larg-

est economy in the region, as well

as the second largest oil producer

within the OPEC Organization.

Successful ly leading the sub-

scription to BCC Investment W.L.L.,

with a capital of USD 30,387,000.

This company was established for

the purpose of acquiring a stake of

75% of the capital of Bahrain Ce-

ment Company (BSCE) – a com-

pany under incorporation in the

Kingdom of Bahrain with a targeted

capital of BHD 8.5 million.

Marketing a portfolio of build-

ings (leasing ending up with own-

ership) for Gulf Investment House,

with a total value of USD 3 million.

Local and Regional Funds’ Performance

Atheer Communications Fund :

The management of Atheer Com-

municat ions Fund successfully

leveraged the investment opportuni-

ties available in the Arabian markets,

with special focus on the telecommu-

nications sector, which is currently

of vital importance. The favorable

factors underlying the Fund’s strong

performance during 2005 include : The

positive performance of the Arabian

telecoms during the year, the choice

of the right timing for investment, and

the geographical diversification and

allocation of the Fund’s assets in the

Arabian markets, providing assets

balance. As a result, the Fund posted

an impressively positive performance

during 2005. The Fund’s performance

since 1.1.2005 till 31.12.2005 was

around 51.2%. During the year, the

Fund distributed 7.5% cash dividends

and 7.5% bonus units, bringing up the

total profit distributions since its incep-

tion in July 2003 to 17.5% cash divi-

dends and 7.5% bonus units.

The Fund’s performance since its in-

ception till 31.12.2005 was around

115.62%.

Kuwait Investment Fund

The Fund’s securities portfolio invest-

ed in the Kuwaiti market displayed an

outstanding performance exceeding

100% for 2005. This was instrumen-

tal in the Fund’s achievement of an

overall strong performance despite

the recession in the real estate invest-

ment sector. The Fund’s profit for the

year 2005 exceeded KD 21 million,

enabling it to distribute 6% (60 fils)

for the first half of 2005, following an

earlier distribution of cash dividends

of 4.5% (45 fils) for the second half

of 2004. The overall performance of

Kuwait Investment Fund for 2005,

including the above mentioned profit

distributions, stood at around 39.5%,

compared to 66.5% since the incep-

tion of the Fund in July 2003 till the

end of 2005.

Performance of Local & GCC Portfolios Dur-

ing 2005

During the past years, local and GCC

third party managed portfolios were

limited in number and were inherited

from a previous period. With Kuwait

Stock Exchange currently attracting

the interest and demand of many GCC

investors, KIC responded to these

trends and established a number of

investment portfolios for GCC inves-

tors in the Kuwaiti stock market. Dis-

cussions are also underway for estab-

lishing other portfolios for other GCC

investors. In tandem with this, KIC

also established a number of trading

portfolios for the account of GCC in-

vestors willing to engage in trading on

the stock markets of Qatar, Sultanate

of Oman and United Arab Emirates.

International Capital Markets Department :

Financial markets were volatile in

2005. They started the year on a neg-

ative tone globally, due to the hike in

oil prices and its negative reflection

on the growth pictures globally. How-

ever, in the course of the year, growth

figures improved in the U.S., Europe

and later in Japan and the Far East.

U.S. economic figures released at that

time pointed to higher than expected

growth, thereby strengthening mar-

kets across the board. Subsequently,

in the U.S., the two hurricanes, pow-

erful and destructive as they were, did

not derail the economy as Fed spend-

ing was set to more than offset the

damages in the affected States.

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2 0 0 5ANNUAL REPORT

Further, the market stabilized in the

fourth quarter, giving positive per-

formance across the board. Credit

markets performance was mixed. In-

vestment-grade and high-yield bond

markets lost ground, but still managed

to squeeze out some excess returns

versus their sovereign counterparts.

Sector-wise, energy did particularly

well, closely followed by telecoms. Of

all the fixed income asset classes, it

was the emerging market debt that put

in the strongest performance over the

year, with continued good inflows, di-

minishing supply and high commodity

prices remaining supportive.

Performance of Inter-national Investments

Funds

“KIC Global Strategy Funds” posted a good performance during 2005, outperforming the international stock markets. “KIC Global Strate-gy Diversified Fund”, which invests in all developed financial markets, rose 13% during the year.

On the other hand, the “European Equities Fund”, which invests in European equities, posted a per-formance of 21.9% during the year, while the “Pacific Equity Fund”, which invests in the Pacific and Asian regions , rose by 18.8% dur-ing 2005.

Corporate Finance Department:

The strong performance of the lo-cal market during 2005 provided

rewarding investment and finance opportunities that positively influ-enced the operating results of the Corporate Finance Department and contributed to achieving its financial targets set for 2005. The local mar-ket attracted the largest share in the financing facilities provided by this department to both conventional and Islamic institutions and com-panies operating in the financial, industrial, real estate and services sectors. KIC played a dual role of arranging for and participating in those financing facilities.

In line with the principle of geo-graphic diversification of risks for this department’s portfolio, the de-partment distributed its financing participations into Qatar, the Sul-tanate of Oman and Ukraine. Most of those transactions, which were arranged in cooperation with inter-national financial instituitons, were in the US dollar and for a short term of less than two years.

Overall, the rise in interest rates on both the Kuwaiti Dinar and US Dollar during 2005, with the conse-quent increase of the cost of funds, resulted in some financial institu-tions and investors refraining from borrowing. This market trend was more obvious in the last quarter of the year.

During the year, the Corporate Fi-nance Department was keen to at-tend financial forums and special-ized training courses, so as to keep abreast of the latest developments in the local, regional and interna-tional markets.

Direct Investment Department

The Direct Investment Department recorded an impressive perfor-mance during 2005. The prominent achievements of this department during the year included an active engagement in the establishment of the following companies, with equity participation therein:

Kuwaiti Chinese Investment Company (KSC), with a stake of 3.75% of its capital.

Warba Investment Company, with a stake of 5% of its capital.

Diyar Al Kuwait Company, with a stake of 5% of its capital.

Rasameel Financial Structuring Company, with a stake of 5% of its capital.

Al Oula Education Company, with a stake of KD 250,000/-.

Establishment and marketing of Al Masar Leasing and Investment Company with a capital of KD 15 million, of which KIC retained a stake of 17.5% for itself.

Establishment of the Kuwaiti-Iranian Holding Company with a capital of KD 1 million. This was an introductory step towards of-fering a capital increase of KD 30 million for this company through a private placement. KIC re-tained for itself a a majority stake of 90% of the initial capital of this company.

Participating by USD 5 million in Ascent Biotechnology Fund – USA.

12

Selling Haspro building owned by the subsidiary KFIC for USD 12.36 million, generating a profit of around USD 4.9 million.

Treasury Department

The year 2005 was characterized

by the noticeable rise in interest

rates on Kuwaiti Dinar, due to the

Central Bank of Kuwait’s increase

of its discount rate several times at

different intervals during the year.

The tangible expansion of KIC’s ac-

tivities during the year was directly

reflected in the rise of the size of

funds provided by the Treasury De-

partment to finance the new invest-

ments of the Company.

Despite this chal lenge, the

Treasury Department succeeded in

attaining its objectives of providing

the required liquidity at competi-

tive rates through expanding the

Company’s lenders’ base beyond

the banking sector. The department

also participated in some local KD

denominated bonds.

The Treasury Department achieved

its targeted profitability through

granting credit lines, both Islamic

and conventional, to several local

companies. The department valu-

ably contributed to highlighting the

role and strength of KIC as a sup-

porter of the local economy in terms

of its financing, and not merely bor-

rowing, activities.

Global Markets Trading Department

The US Stock markets were neu-tral in performance during 2005, with Dow Jones Industrial Average Index (DJIA) declining by 0.6% dur-ing the year, compared to its gains of 3.15% in 2004.

The U.S. Federal Reserve raised its interest rates 13 times, with 25 ba-sis points each, to 4.25%. Another prominent event during 2005 was the rise of oil prices by about 54%, leading to fears of inflation and fur-ther increases in interest rate.

Although the U.S. economy showed strong growth in 2005, high oil pric-es weakened consumer spending and corporate earnings, and re-strained the rise in stock markets. However, since KIC adopted a pre-cautious policy of investment in eq-uities and bonds in global markets, this resulted in saving cost of funds and enabled KIC to avoid losses in-curred by the global markets due to the mentioned factors. According to this prudent policy, the Global Markets Trading Department seeks to buy securities in bearish markets and then lock-in gains against the underlying general indices of those markets.

Information Technology Department

The IT Department achieved sev-eral accomplishments during the

year, most importantly:

1.Redesigning and launching KIC’s Website.

2.Upgrading the computer systems network used in the Company, which reflected in improved per-formance

3.Improving the Network Security Area.

4.Developing an inventory system for the Administration Depart-ment.

In the same context, the IT De-partment also provided the tech-nological and technical support services to the various activities of the Company, particularly in the following areas:

Setting up of online connection with several banks to better mon-itor and manage the Company’s accounts.

Setting up of the process of pro-viding multi- currency services to enhance, support and cater to the needs of the Asset Manage-ment Division.

The Finance & Administration De-partment also played a proactive role towards the success of KIC during 2005. This was demonstrat-ed through providing administrative and accounting support services to all divisions and departments of the Company, with an eye on upgrad-ing the quality of those services to cope with the diversity and growth of KIC’s activities in all lines of busi-ness.

CONSOLIDATED FINANCIAL STATEMENTS

AND INDEPENDENT AUDITORS' REPORT FOR

THE YEAR ENDED 31 DECEMBER 2005

13

2 0 0 5ANNUAL REPORT

CONSOLIDATED FINANCIAL STATEMENTS

AND INDEPENDENT AUDITORS' REPORT FOR

THE YEAR ENDED 31 DECEMBER 2005

14

THE SHAREHOLDERS KUWAIT INVESTMENT COMPANY (S.A.K.) AND SUBSIDIARY

STATE OF KUWAIT

We have audited the accompanying consolidated balance sheet of Kuwait Investment Company (S.A.K.) (“the parent company”) and subsidiary (together known as “the group”) as of 31 December 2005 and the related consolidated statements of income, changes in equity and cash flows for the year then ended. Theseconsolidated financial statements are the responsibility of the parent company’s management. Our responsibilityis to express an opinion on these consolidated financial statements based on our audit.We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audit provides a reasonable basis for our opinion.In our opinion, the consolidated financial statements referred to above present fairly, In all material respectsthe financial position of the group as of 31 December 2005, and the results of its operations and its cash flowsfor the year then ended in accordance with International Financial Reporting Standards as adopted for use by the State of Kuwait.Also in our opinion, the consolidated financial statements include the disclosures required by the CommercialCompanies Law and the Company’s Articles of Association and we obtained the information we required to perform our audit. In addition, proper books of accounts have been kept, and the accounting information given in the Directors’ Report is in agreement with the parent company’s books of account, According to the information available to us, there were no contraventions during the year of either the Commercial Companies Law or of the parent company’s Articles of Association which might have materially affected the group’s financialposition, or results of its operations.We further report that, during the course of our audit, we have not become aware of any violations of the provisions of Law No. 32 of 1968, as amended, concerning currency, the Central Bank of Kuwait and the organization of banking business, and its related regulations, during the year ended 31 December 2005.

Jassim Ahmad Al-Fahad License No. 53-A

Al-Fahad & Co. Deloitte & Touche

Qais M. Al-Nisf License No. 38-A

Moore Stephens Al Nisf & Partners Member of Moore Stephens

International

15

2 0 0 5ANNUAL REPORT

CONSOLIDATED BALANCE SHEETAs at 31 december 2005

Bader N. AlSubaiee Chairman and Managing Director

The notes set out on pages 39 to 59 form an integral part of these consolidated financial statements.

31 December 2005

31 December 2004

Note KD KD

Assets

Cash - current and call accounts 5,028,307 1,948,768

Placements 3 43,247,858 41,483,922

Investments held for trading 4 104,825,204 61,330,117

Loans and advances 5 22,242,621 24,242,896

Government debt bonds 6 927,544 1,077,000

Investments available for sale 7 102,363,345 76,243,795

Investment in associate 8 7,257,350 6,603,734

Unconsolidated subsidiaries 9 4,168,282 2,323,113

Investment properties 10 4,340,413 5,106,667

Other assets 11 11,432,095 8,370,110

Total assets 305,833,019 228,730,122

LIABILITIES AND EQUITY

Liabilities

Call and notice accounts 2,946,927 2,602,949

Deposits 106,923,609 92,902,616

Accrued interest payable 209,716 147,753

Dividend payable 416,661 446,011

Accruals and other liabilities 12 20,449,725 10,661,837

Total liabilities 130,946,638 106,761,166

Equity

Share capital 13 50,000,000 50,000,000

Treasury shares 14 (1,675) (1,675)

Statutory reserve 15 17,492,080 12,003,981

General reserve 16 17,492,080 12,003,981

Retained earnings 53,910,367 26,799,804

Fair value reserve 33,425,187 18,933,953Equity attributable to equity holders of the parent company

172,318,039 119,740,044

Minority interest 2,568,342 2,228,912

Total equity 174,886,381 121,968,956

Total liabilities and equity 305,833,019 228,730,122

Yousef E. Al-Hassawi General Manager

Rasheed Al-Sayyed Yousef Al-Tabtabai Deputy Chairman

16

CONSOLIDATED STATMENT OF INCOMEAs at 31 december 2005

The notes set out on pages 39 to 59 form an integral part of these consolidated financial statements.

31 December 2005

31 December 2004

Notes KD KD

Income

Interest income 3,992,857 2,301,361

Dividend and other investment income 3,562,418 4,333,136

Commission 13,504,518 11,208,772

Income from property rental and management services (net) 17 2,704,279 1,789,552

Gain from investments held for trading 18 40,855,779 7,453,540

Gain on sale of investments available for sale 81,136 653,344

Gain on sale of investment properties 19 591,945 1,727,343

Gain on sale of investment in associate 1,364,056 -

Foreign exchange gain 121,348 42,345

Allowance released/(charged) for credit losses 20 129,090 (240,168)Group share of results from unconsolidated subsidiaries and associate

2,430,964 659,528

Total income 69,338,390 29,928,753

Expenses and charges

Interest expense 3,154,245 1,445,918

General, administrative and other expenses 21 10,159,336 7,463,677

Loss on disposal of equipments 48,105 -

Depreciation and amortisation 1,021,916 770,187

Total expenses and charges 14,383,602 9,679,782

Profit from operations 54,954,788 20,248,971

Other income 78,410 50,200

Profit for the year before provision for contribution to Kuwait Foundation for the Advancement of Sciences and National Labour Support Tax and Directors’ remuneration

55,033,198 20,299,171

Contribution to Kuwait Foundation for the Advancement of Sciences

(493,929) (187,072)

National Labour Support Tax 22 (1,220,474) (461,004)

Directors’ remuneration (80,000) (80,000)

Net profit for the year 53,238,795 19,571,095Attributable to Equity holders of the parent company

53,086,588 20,057,753

Minority interest 152,207 (486,658)

53,238,795 19,571,095Earnings per share attributable to equity holders of the parent company (fils)

23

106.17 40.12

17

2 0 0 5ANNUAL REPORT

2 0 0 5CONSOLIDATED STATMENT OF CHANGES IN EQUITYAs at 31 december 2005

CONSOLIDATED STATMENT OF CASH FLOWSAs at 31 december 2005

ANNUAL REPORT

E

qu

ity

attr

ibu

tab

le t

o e

qu

ity

ho

lder

s o

f th

e p

aren

t co

mp

any

Min

ori

ty

inte

rest

Tota

l eq

uit

y

KD

KD

Sh

are

ca

pit

alTr

easu

ry

shar

esS

tatu

tory

re

serv

eG

ener

al

rese

rve

Ret

ain

ed

earn

ing

sF

air

valu

e re

serv

e

Tota

l

KD

KD

KD

KD

KD

KD

KD

Bal

ance

at

31 D

ecem

ber

200

350

,000

,000

(1,6

75)

9,92

5,39

89,

925,

398

25,8

99,0

4413

,525

,328

109,

273,

493

3,06

3,51

911

2,33

7,01

2

Rev

ersa

l due

to s

ale

of

inve

stm

ents

ava

ilabl

e fo

r sa

le-

--

--

31

9,73

0

319,

730

-

319,

730

Effe

ct o

f cha

nges

in fa

ir va

lue

of

avai

labl

e fo

r sa

le fi

nanc

iala

sset

s-

--

--

5,

088,

895

5,

088,

895

-

5,08

8,89

5

Net

inco

me

reco

gniz

ed d

irect

ly

in e

quity

--

--

-5,

408,

625

5,40

8,62

5-

5,40

8,62

5

Net

pro

fitfo

rth

eye

ar-

--

-20

,057

,753

-20

,057

,753

(486

,658

)19

,571

,095

Tota

l rec

ogni

zed

inco

me

for

the

year

--

--

20,0

57,7

535,

408,

625

25,4

66,3

78(4

86,6

58)

24,9

79,7

20

Cas

h di

vide

nd

--

--

(14,

999,

827)

-(1

4,99

9,82

7)-

(14,

999,

827)

Tra

nsfe

r to

res

erve

s-

-2,

078,

583

2,07

8,58

3(4

,157

,166

)-

--

-

Cha

nge

in m

inor

ity in

tere

st-

--

--

--

(347

,949

)(3

47,9

49)

Bal

ance

at

31 D

ecem

ber

200

450

,000

,000

(1,6

75)

12,0

03,9

8112

,003

,981

26,7

99,8

0418

,933

,953

119,

740,

044

2,22

8,91

212

1,96

8,95

6

Rev

ersa

l due

to s

ale

of

inve

stm

ents

ava

ilabl

e fo

r sa

le-

--

--

(3

7,49

0)

(37,

490)

(3

6,02

0)

(73,

510)

Effe

ct o

f cha

nges

in fa

ir va

lue

of

avai

labl

e fo

r sa

le fi

nanc

iala

sset

s-

--

--

14

,528

,724

14

,528

,724

20

8,05

3

14,7

36,7

77

Net

inco

me

reco

gniz

ed d

irect

ly

in e

quity

--

--

-14

,491

,234

14,4

91,2

3417

2,03

314

,663

,267

Net

pro

fitfo

rth

eye

ar-

--

-53

,086

,588

-53

,086

,588

152,

207

53,2

38,7

95

Tota

l rec

ogni

zed

inco

me

for

the

year

--

--

53,0

86,5

8814

,491

,234

67,5

77,8

2232

4,24

067

,902

,062

Cas

h di

vide

nd

--

--

(14,

999,

827)

-(1

4,99

9,82

7)-

(14,

999,

827)

Tra

nsfe

r to

res

erve

s-

-5,

488,

099

5,48

8,09

9(1

0,97

6,19

8)-

--

-

Cha

nge

in m

inor

ity in

tere

st-

--

--

--

15,1

9015

,190

Bal

ance

at 3

1 D

ecem

ber

200

550

,000

,000

(1,6

75)

17,4

92,0

8017

,492

,080

53,9

10,3

6733

,425

,187

172,

318,

039

2,56

8,34

217

4,88

6,38

1

The notes set out on pages 39 to 59 form an integral part of these consolidated financial statements.

2 0 0 5ANNUAL REPORT

18

2005 2004

Note KD KD

CASH FLOWS FROM OPERATING ACTIVITIESProfit for the period before provision for contribution to Kuwait Foundation for the Advancement of Sciences, National Labour Support Tax and Directors’ remuneration

55,033,198 20,299,171

Adjustments for:Depreciation of property and equipment and amortisation of intangible assets

1,021,916

770,187

Change in minority interest 15,190 (347,949)

Allowance released/(charged) for credit losses (129,090) 240,168

Gain from investments held for trading (40,855,779) (7,453,540)

Gain on sale of investments available for sale (81,136) (653,344)

Gain on sale of investment in associate (1,364,056) -Group share of result from associate and unconsolidated subsidiaries

(2,430,964)

(659,528)

Gain on sale of investment properties (591,945) (1,727,343)

Dividend income (3,545,057) (4,326,646)

Interest income (3,992,857) (2,301,361)

Interest expense 3,154,245 1,445,918

Operating cash flows before movements in working capital 6,233,665 5,285,733

Decrease / (increase) in placements 6,171,716 (6,876,819)

Increase in investments held for trading (2,639,308) (4,984,365)

Decrease / (increase) in loans and advances 2,219,312 (3,958,971)

Increase in other assets (3,568,296) (2,897,611)

Decrease in Government debt bonds 149,456 -

(Decrease) / increase in deposits (1,794,820) 10,000,000

Increase in accruals and other liabilities 7,993,485 541,396

Net cash from/(used in) operating activities 14,765,210 (2,890,637)

CASH FLOWS FROM INVESTING ACTIVITIES

Proceeds from sale of investment properties 800,000 2,582,518

Addition to investment properties (11,197) -

Proceeds from sale of investments available for sale 4,109,590 4,611,146

Purchase of investments available for sale (15,484,737) (21,670,300)

Net amount paid for investment in unconsolidated subsidiaries (672,821) -

Proceeds from sale of investment in associate 1,969,056 (4,444,253)

Dividend received 3,545,057 4,326,646

Interest received 3,892,191 2,320,284

Interest paid (3,092,282) (1,335,092)

Net cash used in investing activities (4,945,143) (13,609,051)

(continued)The notes set out on pages 39 to 59 form an integral part of these consolidated financial statements.

19

2 0 0 5ANNUAL REPORT

2 0 0 5CONSOLIDATED STATMENT OF CASH FLOWSAs at 31 december 2005

ANNUAL REPORT

2005 2004

Note KD KD

CASH FLOWS FROM FINANCING ACTIVITIES

Cash dividend paid (15,029,177) (14,889,228)

Net cash used in financing activities (15,029,177) (14,889,228)

Net decrease in cash and cash equivalents (5,209,110) (31,388,916)

Cash and cash equivalents at beginning of the year (55,648,260) (23,093,964)

Cash and cash equivalents of Kuwait National Real Estate Services and Investment Co.

-

(1,165,380)

Cash and cash equivalents at end of the year 24 (60,857,370) (55,648,260)

The notes set out on pages 39 to 59 form an integral part of these consolidated financial statements.

20

1- INCORPORATION AND ACTIVITIES

Kuwait Investment Company (S.A.K.), (“the parent company”) is a public shareholding investment company incorporated under the laws of the State of Kuwait on 15 November 1961 and its registered office is at SoukAl Manakh, Mubarak Al Kabeer Street, Kuwait and its mailing address is P.O. Box 1005 Safat, 13011 – State of Kuwait. The parent company’s major shareholder is Kuwait Investment Authority.The parent company and its subsidiary (together known as “the group”) are primarily engaged in the following activities:

- Security trading and investment- Real estate investment- Property rental and management- Underwriting bonds and certificate of deposit issues- Time deposit acceptance and placement with financial institutions- Foreign exchange contracts- Holding international, regional and local exhibitions

The consolidated financial statements of the group for the year ended 31 December 2005 were authorized forissue in accordance with a resolution of the Board of Directors on 1 March 2006. The shareholders’ general assembly has the power to amend these financial statements after issuance.

2- SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements have been prepared in accordance with the regulations of the State ofKuwait for financial services institutions regulated by the Central Bank of Kuwait. These regulations requireadoption of International Financial Reporting Standards (IFRS) except for the IAS 39: “Financial Instruments: Recognition and Measurement” requirement for a collective provision, which has been replaced by the Central Bank of Kuwait’s requirement for a minimum general provision as described under the accounting policy for impairment of financial assets.

Significant accounting policies are summarized as follows:

Basis of preparation

The consolidated financial statements are presented in Kuwaiti Dinars and are prepared under the historicalcost convention, except for investments available for sale and held for trading that are stated at fair value.The consolidated financial statements comprise the parent company and its subsidiary Kuwait InternationalFair Company K.S.C. (Closed).The preparation of financial statements in conformity with International Financial Reporting Standards requiresmanagement to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and thereported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Details of the subsidiary companies are set out in Note 26.The group has adopted the revised accounting standards that formed part of the International Accounting Standard Board’s improvements project and are applicable from 1 January 2005 and the International Financial Reporting Standards. The adoption of these Standards has had no material impact on the group’s consolidated financial statements for the year ended 31 December 2005.The adoption of IAS 1, Presentation of Financial Statements (revised 2004) during the year, has resulted in amendments to the presentation of minority interests; accordingly comparative figures have been amended tobe consistent with the presentation of the current year.

21

2 0 0 5ANNUAL REPORT

Basis of consolidation

Subsidiaries are those enterprises controlled by the parent company. Control exists when the parent company has the power, directly or indirectly, to govern the financial and operating policies of an enterprise so as toobtain benefits from its activities. The financial statements of subsidiaries are included in the consolidatedfinancial statements from the date that control effectively commences until the date that control effectivelyceases. Equity and net income attributable to minority interests are shown separately in the balance sheet and statement of income, respectively. Intercompany balances and transactions, including intercompany profits andunrealized profits and losses are eliminated on consolidation. Consolidated financial statements are preparedusing uniform accounting policies for like transactions and other events in similar circumstances. The minority interests are measured by the proportion of the pre-acquisition carrying amounts of the identifiable assets andliabilities of the subsidiaries.

Recognition, classification and measurement of financial instruments

In accordance with IAS 39, the group has classified financial instruments as held for trading, held to maturityor available for sale. Those classified as held for trading and available for sale are carried at fair value.A financial asset or a financial liability is recognized when the group becomes a party to the contractualprovisions of the instrument. A financial asset is derecognized when the group loses control of the contractualrights that comprise the financial asset and a financial liability is derecognized when the obligation specified in the contract is discharged, cancelled or expired.All financial instruments are initially recognized at cost being the fair value at the date of purchase (whichincludes transaction costs).Derivative instruments are initially recognized in the balance sheet at cost (including transaction costs) and subsequently measured at their fair value.The fair value of a derivative is the equivalent of the unrealized gain or loss from marking to market the derivative using prevailing market rates or internal pricing models. Derivatives with positive market values (unrealized gains) are included in other assets and derivatives with negative market values (unrealized losses) are included in other liabilities in the consolidated balance sheet, The resultant gains and losses are included in the consolidated statement of income.

Impairment and uncollectability of financial assets

The carrying amounts of the group’s financial assets and tangible assets are reviewed at each balance sheetdate to determine whether there is any indication or objective evidence of impairment. If any such indication or evidence exists, the asset’s recoverable amount is estimated and an impairment loss is recognized in the consolidated statement of income. The recoverable amount of the group’s receivables is calculated as the present value of expected future cash flows, discounted at the original effective yield rates inherent in theasset. Receivables and loans with a short duration are not discounted. In addition, in accordance with Central Bank of Kuwait instructions, a minimum general provision of 2% is made on all credit facilities net of certain restricted categories of collateral, not subject to specific provision.The recoverable amount of the group’s investments held for trading and investments available for sale are their fair value. The recoverable amount of other assets is the higher of an asset’s fair value less costs to sell and value in use. The fair value less costs to sell is the amount obtainable from the sale of an asset in an arm’s length transaction while value in use is the present value of estimated future cash flows expectedto arise from the continuing use of an asset and from its disposal at the end of its useful life. Recoverable amounts are estimated for individual assets or, if it is not possible, for the cash-generating unit to which the asset belongs.

Reversal of impairment of assets

Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, such that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized

22

for the asset (cash-generating unit) in prior years. A reversal of impairment loss is recognized immediately in the consolidated statement of income, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase. Impairment losses recognized in the consolidated income statement on available for sale equity instruments are not reversed through the consolidated income statement.

Cash and cash equivalents

Cash and cash equivalents consists of cash - current and call accounts, placements maturing within ninety days from the date of acquisition, less call and notice accounts, deposits maturing within ninety days from the date of acquisition.

Placements

Placements are stated at amortized cost less any provision for impairment.

Loans and advances

Loans originated by the group by providing money directly to the borrower or to a sub-participation agent at draw down are classified as ‘loans originated by the group’ and are carried at amortized cost less any provisionfor impairment. Third party expenses such as legal fees, incurred in granting a loan are treated as part of the cost of the transaction.All loans and advances are recognized when cash is advanced to borrowers.Loans and advances are written off when there is no realistic prospect of recovery.Specific provisions are calculated on the losses of loans and advances originated by the group against creditrisks. The specific provision is made for loans originated by the group against the credit risks due to impairmentof loans and advances, in case there is an objective evidence of non-collection of the due amount. The provision amount is the difference between the carrying value of loans and advances and the recoverable amount, which is the present value of the expected future cash flows including the amounts recoverablefrom collaterals and assets pledged in favour of the group, discounted by the effective interest rate prevailing in the market for variable rate loans. Provision for impairment loss in loans and advances is charged to the consolidated statement of income.

Government debt bonds

Government debt bonds are carried at cost.

Investments held for trading

Investments held for trading are securities that were acquired for generating a profit from short-term fluctuationsin either price or dealer’s margin. Investments held for trading are measured at fair value based on quoted current bid prices, All realized and unrealized gains and losses are included in the consolidated statement of income

Investments available for sale

Securities acquired to be held for an indefinite period of time, which may be sold in response to needs forliquidity or changes in value, interest rates or exchange rates are classified as available for sale.Investments available for sale are initially recognised at cost being the fair value plus transaction costs that are directly attributable to the acquisition.Subsequent to acquisition, available for sale financial assets are re-measured at fair value and unrealizedgains and losses arising from changes in their fair values are taken to equity in the “fair value reserve” account.

23

2 0 0 5ANNUAL REPORT

When the available for sale asset is disposed of, or impaired, the related accumulated fair value adjustments are transferred to the consolidated statement of income as gains or losses. Fair values are based on quoted current bid prices or using the current market rate of interest for that instrument. Fair values for unquoted equity instruments are estimated using applicable price/earnings or price/cash flow ratios refined to reflect thespecific circumstances of the issuer. Investments, whose fair value cannot be reliably measured are carried atcost less impairment losses, if any.

Investments held to maturity

Investments with a fixed and determinable maturity and where management has both the positive intent andability to hold them till maturity are classified as investments held to maturity and are carried at amortized costless any provision for impairment.

Trade and settlement date accounting

All regular way purchases and sales of financial assets are recognised on the trade date i.e. the date the groupcommits to purchase or sell the assets. Regular way purchases or sales are purchases or sales of financialassets that require delivery of the asset within a time frame generally established by regulation or convention in the market place concerned.

Unconsolidated subsidiaries and associates

Investments comprising between 20% and 50% of the total equity share capital of a company and over which the group can exert significant influence are classified as associates. Unconsolidated subsidiaries andassociates are accounted for using the equity method of accounting based on the latest audited financialstatements or other information as appropriate, adjusted for any impairment in value and the pro-rata share of income (loss) is included in the consolidated statement of income.

Investment properties

Developed land and buildings and buildings erected on leased land are initially stated at cost and buildings and buildings erected on leased land are depreciated using the straight-line method over the lease period for buildings erected on leased land. Undeveloped land is not depreciated. The carrying amounts are reviewed at each balance sheet date to assess whether they are recorded in excess of their recoverable amounts, and where carrying values exceed their recoverable amount assets are written down to their recoverable amount.

Call and notice accounts and deposits

Call and notice accounts and deposits are stated at amortized cost.

Provisions

A provision is recognized only when the group has a present legal or constructive obligation as a result of a past event and it is probable that an outflow of resources embodying economic benefits will be requiredto settle the obligation, and a reliable estimate can be made of the amount of the obligation. Provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimate. Where the effect of thetime value of money is material, the amount of a provision is the present value of the expenditures expected to be required to settle the obligation.

24

End of service indemnity

Provision is made for amounts payable to employees under the Kuwait Labour Law and employee contracts. This liability, which is unfunded, represents the amount payable to each employee as a result of involuntary termination on the balance sheet date, and approximates the present value of the final obligation.

Treasury shares

Treasury shares consist of the parent company’s own shares that have been issued, subsequently reacquired by the parent company and not yet reissued or canceled. The treasury shares are accounted for using the cost method. Under the cost method, the weighted average cost of the shares reacquired is charged to a contra equity account. When the treasury shares are reissued, gains are credited to a separate account in equity (gain on sale of treasury shares) which is not distributable. Any realized losses are charged to the same account to the extent of the credit balance on that account. Any excess losses are charged to retained earnings then reserves. Gains realized subsequently on the sale of treasury shares are first used to offset anypreviously recorded losses in the order of reserves, retained earnings and the gain on sale of treasury shares account. No cash dividends are paid on these shares. The issue of bonus shares increases the number of treasury shares proportionately and reduces the average cost per share without affecting the total cost of treasury shares.

Revenue recognition

Interest income is recognized when earned on a time apportionment basis. Dividends are recognized when the shareholders’ right to receive payment has been established. Management fees relating to portfolios and fund management are recognized when earned. Commission from guarantees and commitments are recorded on the accrual basis. Revenue from property rental and management services are recognized when services are rendered by the group. Gain on sale of investments is measured by the difference between the sale proceeds and the carrying amount of the investment at the date of disposal, and is recognized at the time of sale.

Fiduciary assets

Assets held in trust or in a fiduciary capacity are not treated as assets of the group and, accordingly, are notincluded in these consolidated financial statements.

Foreign currencies

The functional currency of the company is Kuwaiti Dinars (“KD”). Transactions denominated in foreign currencies are translated into KD at rates of exchange prevailing at the transaction dates. Monetary assets and liabilities denominated in foreign currencies are retranslated into KD at rates of exchange prevailing at the balance sheet date. The resultant exchange differences are included in the statement of income.

Segment reporting

A segment is a distinguishable component of the group that is engaged either in providing products or services (business segment), or in providing products and services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments.

Borrowing costs

Interest on borrowings is calculated under the accrual basis and recognised in the period in which is incurred.

25

2 0 0 5ANNUAL REPORT

Estimation uncertainty

The key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets andliabilities within the next financial year are discussed below :

Valuation of unquoted equity investmentsValuation of unquoted equity investments is normally based on one of the following:

- recent arm’s length market transactions;- current fair value of another instrument that is substantially the same;- the expected cash flows discounted at current rates applicable for items with similar terms and risk

characteristics; or- other valuation models.

Judgement

In the process of applying the group’s accounting policies, management has made the following judgement, apart from those involving estimations, which has the most significant effect on the amounts recognised in thefinancial statements:

Classification of investmentsManagement decides on acquisition of an investment whether it should be classified as held to maturity,available for sale or investments held for trading. For those deemed to be held to maturity, the group ensures that the requirements of IAS 39 are met and in particular when the group has the intention and ability to hold these to maturity.The group classifies investments as held for trading if the investment has been acquired principally for thepurpose of selling it in the near term and its fair value can be reliably determined. All other investments are classified as available for sale.

3- PLACEMENTSPlacements include a blocked deposit with a local bank of US$ 5.25 million (2004 - US$ 5.25 million) equivalent to KD 1,535,179 (2004 - KD 1,549,249). This deposit is placed as collateral against loans granted by the bank concerned to Kuwait Foreign Investment Co., Inc., a subsidiary. This deposit will not be released until the loans are repaid.

4- INVESTMENTS HELD FOR TRADING31 December

200531 December

2004KD KD

Kuwaiti shares 22,591,276 19,282,895

Gulf shares 9,198,969 2,390,280

Local funds 57,316,100 34,139,038

Foreign shares 8,177,833 34,417

Foreign funds 7,541,026 5,483,487

104,825,204 61,330,117

26

5- LOANS AND ADVANCESLoans and advances are stated net of provision for impairment. The composition of the loans and advances portfolio is as follows:

31 December 2005

31 December 2004

KD KDInternational 6,450,442 8,243,864

Domestic 15,792,179 15,999,032

22,242,621 24,242,896

Movement in provision for impairment:31 December

200531 December

2004

KD KDBalance at beginning of the year 20,777,733 20,760,972

Charge recovery for the year (Note 20) (219,038) 79,183

Exchange differences (217,945) 38,965

Amounts ceded to Central Bank of Kuwait (Note 6) (146,479) (101,387)

Balance at end of the year 20,194,271 20,777,733

The policy of the group for calculation of the provision for impairment for loans and advances complies in all material respects with the specific and general provision requirements of the Central Bank of Kuwait. In thisregard, the Central Bank of Kuwait requires a general provision of 2% on all credit facilities not subject to specific provision. All loans are term loans granted to companies and financial institutions.

6- GOVERNMENT DEBT BONDS

The Central Bank of Kuwait purchased resident Kuwaiti customers’ debts and resident debts of other Gulf Cooperation Council nationals existing as of 1 August 1990, in addition to related interest up to 31 December 1991, on behalf of the Government of Kuwait in accordance with Decree No. 32/92 and Law No.41/93, as amended, in respect of the financial and banking sector. These balances are related toa company acquired after 1 August 1990 and subsequently merged with the parent company.The purchase value of these debts was settled by the issue of bonds, with a value date of 31 December 1991. The bonds mature over a maximum period of twenty years from the value date. Interest will be at a rate fixed semi-annually set by the Central Bank of Kuwait, and will be payable semi-annually in arrears; theaverage interest rate for 2005 was 2.64% (2004 - 1.82%) per annum.The group has a contingent liability in respect of any adjustment that the Central Bank of Kuwait may make to the amount of the bonds, in respect of debts that do not fulfil the conditions of the law underwhich they were purchased.

7- INVESTMENTS AVAILABLE FOR SALE2005 2004

KD KDQuoted securities 28,010,764 19,563,983

Unquoted securities 74,352,581 56,679,812

102,363,345 76,243,795

It was not possible to reliably measure the fair value of certain unquoted securities amounting to KD 20,668,960 (2004 - KD 11,890,701), hence these investments are stated at cost less impairment losses, if any.

27

2 0 0 5ANNUAL REPORT

8- INVESTMENT IN ASSOCIATE

2005 2004

KD KD Kuwait National Real Estate Services and Investment Co. 7,257,350 6,603,734

At 31 December 2005, the group owned 17.98% (2004: 20%) of the shares of Kuwait National Real Estate Services and Investment Company. The parent company sold 6,050,000 shares (2.02%) of the associate in the Kuwait Stock Exchange and recognized a gain of KD 1,364,056. The group exercises significant influenceover the activities of the associate. The group’s share of the results of the associate is based on the results of the associate for the 9-month period ended 30 September 2005. The assets, liabilities, revenues and net profit of the associate for the 9-month period ended 30 Septemberwas as follows:

2005 2004

KD KDAssets 49,008,623 36,155,137

Liabilities 8,580,943 5,268,933

Revenues 8,420,711 567,870

Net profit 7,856,696 435,361

At 31 December 2005, the fair value of the investment in associate was KD 14,836,250 as the associate became listed on the Kuwait Stock Exchange during the year.

9- UNCONSOLIDATED SUBSIDIARIES2005 2004

KD KDCredit Des Bergues 1,303,044 1,523,362

Kuwait Foreign Investment Co., Inc. 1,928,581 763,165

Kuwait Iranian Holding Co. 900,000 -

Others 36,657 36,586

4,168,282 2,323,113

Unconsolidated subsidiaries were not consolidated on the grounds that their assets, liabilities and results are not material to the financial statements of the group.

28

10- INVESTMENT PROPERTIES

Developed land and buildings

Buildings on leased

land

Undeveloped

land

Total

KD KD KD KD

Cost

At 31 December 2004 313,041 12,745,832 856,263 13,915,136

Additions - 1,367 9,830 11,197

Disposals (313,041) - - (313,041)

At 31 December 2005 - 12,747,199 866,093 13,613,292 Accumulated depreciation and provision

At 31 December 2004 104,986 8,545,098 158,385 8,808,469

Charge for the year - 569,396 - 569,396

Relating to disposals (104,986) - - (104,986)

At 31 December 2005 - 9,114,494 158,385 9,272,879

Net book value

At 31 December 2005 - 3,632,705 707,708 4,340,413

At 31 December 2004 208,055 4,200,734 697,878 5,106,667

One of the group’s buildings is erected on land leased from the Government of Kuwait for 25 years, the lease of which expired on 1 April 1999. In reference to the Ministerial order No. 66 of 2001, relating to licences and contracts of buildings and premises constructed on land leased from the Government, the group has accrued for rental expense due to the Ministry of Finance for land leased from the Government for which the group has an agreement to renew the lease for 10 years ending on 31 March 2009. As per this agreement, the group is liable to pay an annual rent of KD 271,366. The future minimum lease payments for the rent regarding the leased land are as follows:

2005 2004

KD KD

Up to one year 271,366 271,366

More than 1 year and up to 3 years (2 years and 3 months) 610,574 881,940

881,940 1,153,306

The fair value of investment properties as per independent valuation is KD 4,957,556 (2004 - KD 5,910,315).

11- OTHER ASSETS

2005 2004

KD KD

Accounts receivable 5,267,151 3,166,647

Management fees receivable 3,254,068 1,636,382

Accrued interest 508,130 352,861

Others 2,402,746 3,214,220

11,432,095 8,370,110

29

2 0 0 5ANNUAL REPORT

12- ACCRUALS AND OTHER LIABILITIES

2005 2004

KD KDSundry creditors and accrued expenses 4,465,807 2,853,751

Employees’ benefits payable 3,226,873 1,326,323

Due to Gulf Energy, Qatar 4,204,272 -

National Labour Support Tax payable 1,220,474 461,004

Provision for end of service indemnity 4,577,568 4,127,862

Provision for staff leave 687,336 590,665

Kuwait Foundation for the Advancement of Sciences payable 493,929 187,072

Others 1,573,466 1,115,160

20,449,725 10,661,837

13- SHARE CAPITAL

2005 2004

KD KDAuthorized, issued and fully paid- up share capital of 500,000,000 shares at a nominal value of 100 Kuwaiti Fils, each

50,000,000

50,000,000

The parent company has one class of ordinary share which carries no right to fixed income.

14- TREASURY SHARES

2005 2004

Number of shares 5,780 5,780

Percentage of issued shares 0.001156% 0.001156%

Cost (KD) 1,675 1,675

Market value (KD) 4,219 2,139

15- STATUTORY RESERVE

In accordance with the Commercial Companies Law of 1960, as amended, 10% of profit for the year beforeprovision for contribution to Kuwait Foundation for the Advancement of Sciences, National Labour Support Tax and Directors’ remuneration is transferred to statutory reserve. The parent company may resolve to discontinue such annual transfers when the reserve reaches 50% of the paid-up share capital.Distribution of the statutory reserve is limited to the amount required to enable the payment of dividend of 5% of share capital in years when retained earnings are not sufficient for the payment of dividend of thatamount.

16- GENERAL RESERVE

In accordance with the parent company’s Articles of Association, 10% of net profit for the year beforeprovision for contribution to Kuwait Foundation for the Advancement of Sciences, National Labour Support Tax and Directors’ remuneration is to be transferred to the general reserve. This transfer may be discontinued by a resolution adopted by the ordinary assembly as recommended by the Board of Directors. There are no restrictions on distributions from the general reserve.

30

17- INCOME FROM PROPERTY RENTAL AND MANAGEMENT SERVICES (NET)

2005 2004

KD KD

Revenue 3,755,461 3,928,505

Less: Costs (1,051,182) (2,138,953)

2,704,279 1,789,552

18- GAIN FROM INVESTMENTS HELD FOR TRADING

2005 2004

KD KD

Net realized gain from investments held for trading 26,854,249 7,249,968

Unrealized gain from changes in fair value of investments held for trading

14,001,530 203,572

40,855,779 7,453,540

19- GAIN ON SALE OF INVESTMENT PROPERTIES

During the year, the group sold certain investment properties for KD 800,000 (2004 - 2,582,518) resulting in a gain of KD 591,945 (2004 - KD 1,727,343).

20- ALLOWANCE RELEASED / (CHARGED) FOR CREDIT LOSSES

2005 2004

KD KD

Loans and advances 219,038 (79,183)

Other receivables 595 (160,985)

Non-cash facilities (90,543) -

129,090 (240,168)

21- GENERAL, ADMINISTRATIVE AND OTHER EXPENSES

General, administrative and other expenses include employees’ costs of KD 6,848,695 (2004 - 4,709,738).

22- NATIONAL LABOUR SUPPORT TAX

In accordance with the Ministry of Finance resolution No. 26 of 2001, the group has calculated National Labour Support Tax at 2.5% of profit for the year after deducting the contribution to the Kuwait Foundationfor the Advancement of Sciences, 10% transfer to statutory reserve and director’s remuneration.

31

2 0 0 5ANNUAL REPORT

23- EARNINGS PER SHARE ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENTCOMPANY

Earnings per share is computed by dividing net profit by the weighted average number of shares outstandingduring the year.

2005 2004

KD KDNet profit for the year attributable to equity holders of theparent company 53,086,588 20,057,753

Shares Shares

Number of shares outstanding:

Number of issued shares 500,000,000 500,000,000

Weighted average number of treasury shares (5,780) (5,780)

Weighted average number of shares outstanding 499,994,220 499,994,220

Earnings per share 106.17 fils 40.12 fils

24- CASH AND CASH EQUIVALENTS 2005 2004

KD KD

Cash- current and call accounts 5,028,307 1,948,768

Placements maturing within ninety days 35,779,679 27,908,537Call and notice accounts and deposits maturing within ninety days

(101,665,356) (85,505,565)

(60,857,370) (55,648,260)

25- PROPOSED CASH DIVIDEND

Subsequent to the balance sheet date, the Board of Directors have proposed a cash dividend of 60 fils per shareamounting to KD 29,999,654 after excluding treasury shares. This proposal is subject to the approval of the shareholders’ annual general assembly.During 2005 a cash dividend of 30 fils per share amounting to KD 14,999,827 after excluding treasury shareswas approved for the year ended 31 December 2004 at the annual general meeting held on 30 March 2005 and any unpaid dividends are included under other liabilities

26- SUBSIDIARY COMPANIES

Details of significant subsidiary companies are set out below:

Name

Country of

incorporation

Percentage of ownership

and voting power

Activity

Kuwait International Fair Company K.S.C. (Closed)

Kuwait

51%

Property rental services

Credit Des Bergues Switzerland 100%Investment management services

Kuwait Foreign Investment Co., Inc.

USA

100%Property rental and management services

KIC Fund Managers Cayman Islands

100% Investments

Kuwait Iranian Holding Co. Kuwait 90% Investments

32

During 2005, the parent company established a 90% owned Kuwait shareholding company called Kuwait Iranian Holding Company with a capital contribution of KD 900,000.Investments in unconsolidated subsidiaries, Credit Des Bergues, Kuwait Foreign Investment Co. Inc, Kuwait Iranian Holding Co. and KIC Fund Managers are disclosed separately in Note 9.

27- FIDUCIARY ASSETS

The group manages investment portfolios on behalf of a principal shareholder, government agencies and financial institutions. The total value of these portfolios at 31 December 2005 amounted to KD 2.13 billion(2004: KD 1.87 billion) which are not reflected in the consolidated financial statements.

As an agent for its custody clients, the group enters into contractual agreements with counterparties, usually brokers, whereby the brokers can borrow the custody clients’ securities for a specified period of time toenhance the return on clients’ securities. There is a risk of loss to the portfolios’ owners if the counterparties default.

28- RELATED PARTY TRANSACTIONS

These represent transactions with certain related parties who were customers of the group during the year. The terms of these transactions are approved by the group’s management and are on arm’s length basis. The balances included in the consolidated financial statements are as follows

2005 2004

KD KD

Assets

Other assets 204,918 350,585

Liabilities

Call and notice accounts 610,224 602,420

Deposits 10,526,940 9,592,338

11,137,164 10,194,758

Income statement

Commission 317,306 389,131

Interest expense 163,975 118,188

481,281 507,319

29- COMPENSATION OF KEY MANAGEMENT PERSONNEL

The compensation of directors and other key members of management exclusive of directors’ remuneration was as follows:

2005 2004

KD KDSalaries and other short term benefits 583,829 414,859

Post-employment benefits 65,422 65,195

649,251 480,054

33

2 0 0 5ANNUAL REPORT

30. FAIR VALUE OF FINANCIAL INSTRUMENTS

In the opinion of management, except for Government debt bonds, the carrying values of all other financialinstruments are not significantly different from their fair values.

It is not practicable to determine the fair value of Government debt bonds with accuracy, as the future cash flows are not determinable. Information on the principal characteristics of these bonds is presentedin Note 6 to the consolidated financial statements.

31- FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

In the ordinary course of business, the group uses financial instruments including derivatives. The use offinancial instruments also brings with it associated inherent risks. The group recognizes the relationshipbetween returns and risks associated with the use of financial instruments and the management of risksforms an integral part of the group’s strategic objectives.

The strategy of the group is to maintain a strong risk management culture and manage the risk/reward relationship within and across the group’s major risk-based lines of business.

The following sections describe the several risks inherent in the business, their nature and how they are managed.

a) Credit risk

Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation andcause the other party to incur a financial loss. The group attempts to control credit risk by monitoringcredit exposures, limiting transactions with specific counter parties, and continually assessing thecreditworthiness of counter parties.Concentrations of credit risk arise when a number of counter parties are engaged in similar business activities or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. Concentrations of credit risk indicate the relative sensitivity of the group’s performance to developments affecting a particular industry or geographic locationThe group seeks to manage its credit risk exposure through diversification of lending activities to avoidundue concentrations of risks with individuals or groups of customers in specific locations or business.It also obtains security when appropriate.

Geographical risk analysis

The geographical concentration of assets and liabilities is summarized as follows:

Assets

Liabilities and equity

Off balance sheet items

2005 2004 2005 2004 2005 2004

KD 000 KD 000 KD 000 KD 000 KD 000 KD 000

G.C.C. 271,316 198,221 301,976 216,180 6,577 2,050Other Middle East and Africa

1,793

1,804

-

-

-

-

Europe 16,363 19,407 3,549 12,245 - -

North America 15,269 6,198 - - - -

Asia 1,092 3,100 308 305 - -

305,833 228,730 305,833 228,730 6,577 2,050

34

Financial instruments with contractual amounts representing credit risk

In the normal course of meeting the needs of its customers for liquidity, foreign exchange and interest rate protection, managing its own exposure to fluctuations in interest rates and foreign exchange rates, andearning trading and fee revenue, the group is a party to various derivative financial instruments. All financialinstruments are subject to formal credit standards, financial controls and risk management and monitoringprocedures.

2005 2004KD 000

KD 000Commitments on behalf of customers for which there were corresponding liabilities by the customers concerned :

Guarantees 6,577 2,050

b) Interest rate risk

Interest rate risk is the sensitivity of the group’s financial condition to future movements in interest rates.

The group is exposed to interest rate risk as a result of mismatches or ‘gaps’ in the amounts of assets and liabilities that mature or reprice in a given period. The group can reduce this risk by matching the repricing of assets and liabilities through a number of ways.The group’s interest rate sensitivity gap, based on the contractual repricing or maturity dates, whichever dates are earlier, is as follows:

At 31 December 2005

Up to

1 month

1 – 3

months

3 - 12

months

Non interest

sensitive

Total

Effective

interest rate

KD 000 KD 000 KD 000 KD 000 KD 000 %Assets

Cash - current and call accounts

Placements

Investments held for trading

Loans and advances

Government debt bonds

Investments available for sale

Investment in associate

Unconsolidated subsidiaries

Investment properties

Other assets

Total assets 33,130 35,543 9,795 227,365 305,833

5,028

-

104,825

372

-

89,9437,257

4,168

4,340

11,432

35

2 0 0 5ANNUAL REPORT

Up to

1 month

1 - 3

months

3 - 12

months

Non interest

sensitive

Total

Effective

interest rate

KD 000 KD 000 KD 000 KD 000 KD 000 %

Liabilities and equity

Call and notice accounts 2,947 - - - 2,947 1.00 - 3.00

Deposits 82,434 15,892 8,598 - 106,924 2.00 - 7.00

Accrued interest payable - - - 210 210 -

Dividends payable - - - 417 417 -

Accruals and other liabilities - - - 20,449 20,449 -Equity attributable to equity holders of the parent company

- - - 172,318 172,318 -

Minority interest - - - 2,568 2,568 -

Total liabilities and equity 85,381 15,892 8,598 195,962 305,833

Interest rate sensitivity gap (52,251) 19,651 1,197 31,403 -

At 31 December 2004

Up to

1 month

1 – 3

months

3 - 12

months

Non interest

sensitive

Total

Effective

interest rate

KD 000 KD 000 KD 000 KD 000 KD 000 %

Assets

Cash- current and call accounts

-

-

-

1,949

1,949

-

Placements 24,660 10,824 6,000 - 41,484 1.875 - 7.5625

Investments held for trading - - - 61,330 61,330 -

Loans and advances 4,087 13,997 5,784 375 24,243 3.19 - 12

Government debt bonds - - 1,077 - 1,077 1.88

Investments available for sale 2,949 5,976 2,713 64,605 76,243 1.54188 - 6.5

Investment in associate - - - 6,604 6,604 -

Unconsolidated subsidiaries - - - 2,323 2,323 -

Investment properties - - - 5,107 5,107 -

Other assets - - - 8,370 8,370 -

Total assets 31,696 30,797 15,574 150,663 228,730

36

Up to

1 month

1 – 3

months

3 - 12

months

Non interest

sensitive

Total

Effective

interest rate

KD 000 KD 000 KD 000 KD 000 KD 000 %

Liabilities and equity

Call and notice accounts 2,603 - - - 2,603 1 - 3

Deposits 79,952 7,951 5,000 - 92,903 0.625 - 4.875

Accrued interest payable - - - 148 148 -

Dividend payable - - - 446 446 -

Accruals and other liabilities - - - 10,661 10,661 -

Equity attributable to equity holders of the parent company

-

-

-

119,740

119,740

-

Minority Interest - - - 2,229 2,229 -

Total liabilities and equity 82,555 7,951 5,000 133,224 228,730

Interest rate sensitivity gap (50,859) 22,846 10,574 17,439 -

The effective interest rates for major currencies are as follows:

2005 2004

Great Britain Pounds

Kuwaiti Dinars

US

Dollars

Great Britain Pounds

Kuwaiti Dinars

US Dollars

Assets % % % % % %

Placements - 6.34 4.30 7.42 3.33 3.42

Loans and advances - 8.74 7.44 - 7.7 4.65

Investments available for sale - 6.05

4.78

-

4.5

2.56

Government debt bonds - 2.90 - - 1.88 -

Liabilities

Call and notice accounts 3 2 3 3 1 1.875

Deposits - 5.18 4.48 4.875 2.4 2.5

c ) Liquidity riskLiquidity risk is the risk that the group will be unable to meet its net funding requirements. Liquidity risk can be caused by market disruptions or credit downgrades which may cause certain sources of funding to dry up immediately. To guard against this, risk management have diversified funding sources and assetsare managed with liquidity in mind, maintaining a healthy balance of cash, cash equivalents and readily marketable securities.The table below summarizes the maturity profile of the group’s assets and liabilities. The contractualmaturities of assets and liabilities have been determined on the basis of the remaining period at the balance sheet date to the contractual maturity date and do not take account of the effective maturities as indicated by the group’s deposit retention history and the availability of liquid funds. The maturity profile is monitoredby management to ensure adequate liquidity is maintained, The maturity profile of the assets and liabilitiesat the year end are based on the contractual repayment arrangements.

37

2 0 0 5ANNUAL REPORT

Liq

uid

ity

risk

At

31 D

ecem

ber

200

5A

t 31

Dec

emb

er 2

004

1 -

3 m

on

ths

3 -

12

mo

nth

s1

- 5

year

sO

ver

5

year

s

Tota

l1

- 3

mo

nth

s3

- 12

m

on

ths

1 -

5 ye

ars

Ove

r

5 ye

ars

To

tal

KD

000

KD

000

KD

000

KD

000

KD

000

KD

000

KD

000

KD

000

KD

000

KD

000

Ass

ets

Cas

h -

curr

ent a

nd c

all a

ccou

nts

5,02

8-

--

5,02

81,

949

--

-1,

949

Pla

cem

ents

39,2

733,

975

--

43,2

4833

,935

6,00

01,

549

-41

,484

Inve

stm

ents

hel

d fo

r tr

adin

g10

4,82

5-

--

104,

825

61,3

30-

--

61,3

30

Loan

s an

d ad

vanc

es

860

8,52

812

,855

-22

,243

2,64

09,

384

12,2

19-

24,2

43

Gov

ernm

ent d

ebt b

onds

--

-92

892

8-

--

1,07

71,

077

Inve

stm

ents

ava

ilabl

e fo

r sa

le

37,0

82-

-65

,282

102,

364

-28

,063

13,2

2934

,951

76,2

43

Inve

stm

ent i

n as

soci

ate

--

-7,

257

7,25

7-

--

6,60

46,

604

Unc

onso

lidat

ed s

ubsi

diar

ies

--

-4,

168

4,16

8-

--

2,32

32,

323

Inve

stm

ent p

rope

rtie

s-

708

-3,

632

4,34

0-

698

4,40

9-

5,10

7

Oth

er a

sset

s8,

641

2,10

268

9-

11,4

326,

370

750

1,25

0-

8,37

0

195,

709

15,3

1313

,544

81,2

6730

5,83

310

6,22

444

,895

32,6

5644

,955

228,

730

Lia

bili

ties

an

d e

qu

ity

Cal

l and

not

ice

acco

unts

2,94

7-

--

2,94

72,

603

--

-2,

603

Dep

osits

98,3

268,

598

--

106,

924

87,9

035,

000

--

92,9

03

Acc

rued

inte

rest

pay

able

147

63-

-21

011

533

--

148

Div

iden

d pa

yabl

e41

7-

--

417

446

--

-44

6

Acc

rual

s an

d ot

her

liabi

litie

s15

,184

-68

74,

578

20,4

495,

301

642

590

4,12

810

,661

Equ

ity a

ttrib

utab

le to

equ

ity

hol

ders

of t

he p

aren

t -

- -

17

2,31

8

172,

318

- -

-

119,

740

11

9,74

0

Min

ority

inte

rest

--

-2,

568

2,56

8-

--

2,22

92,

229

117,

021

8,66

168

717

9,46

430

5,83

396

,368

5,67

559

012

6,09

722

8,73

0

38

d) Currency risk

The group views itself as a Kuwaiti entity with Kuwaiti Dinars as its functional currency. Hedging transactions are used to manage any significant risk in other currencies.The group had the following significant net exposures denominated in foreign currencies as at31 December:

Equivalent Long / (short)

2005

Equivalent Long / (short)

2004

KD 000 KD 000

Net assets (liabilities):

US Dollars (2,049) (2,767)

Euros 344 89

Pounds Sterling 64 (408)

Japanese Yen 198 166

Others 3,139 4,048

e) Market risk

Market risk is the risk that the value of a financial instrument will fluctuate as a result of changes in marketprices, whether those changes are caused by factors specific to the individual security, or its issuer, orfactors affecting all securities traded in the market.The group is exposed to market risk with respect to its investments.The group limits market risk by maintaining a diversified portfolio and by continuous monitoring ofdevelopments in international equity and bond markets. In addition, the group actively monitors the key factors that affect stock and bond market movements, including analysis of the operational and financialperformance of investees.

39

2 0 0 5ANNUAL REPORT

32-

SE

GM

EN

TAL

AN

ALY

SIS

The

gro

up is

org

aniz

ed in

to fu

nctio

nal d

ivis

ions

to m

anag

e its

var

ious

line

s of

bus

ines

s. T

he g

roup

ope

rate

s m

ainl

y in

the

Sta

te o

f Kuw

ait a

nd, a

ccor

ding

ly, d

oes

not h

ave

a

seco

ndar

y ge

ogra

phic

al s

egm

ent.

For

the

purp

oses

of p

rimar

y se

gmen

t rep

ortin

g, m

anag

emen

t has

com

bine

d th

e gr

oup’

s pr

oduc

ts a

nd s

ervi

ces

into

the

follo

win

g bu

sine

ss

segm

ents

:

• In

vest

men

t tra

ding

: Con

sist

s of

sec

uriti

es tr

adin

g an

d in

vest

men

t act

iviti

es.

• T

reas

ury:

Con

sist

s of

fore

ign

exch

ange

and

mon

ey m

arke

t act

iviti

es.

• A

sset

man

agem

ent:

Con

sist

s of

inve

stm

ent p

ortfo

lio a

ctiv

ities

.

• O

ther

ope

ratio

ns: C

onsi

sts

of le

ndin

g, r

eal e

stat

e, in

vest

men

t pro

pert

y, p

rope

rty

rent

al a

nd o

ther

man

agem

ent a

ctiv

ities

.

The

re a

re n

o in

ter-

segm

enta

l tra

nsac

tions

. T

he fo

llow

ing

is th

e de

tail

of th

e ab

ove

segm

ents

, whi

ch c

onst

itute

s th

e pr

imar

y se

gmen

t inf

orm

atio

n:

31 D

ecem

ber

2005

31 D

ecem

ber

2004

Inve

stm

ent

trad

ing

Tre

asur

yA

sset

m

anag

emen

tO

ther

op

erat

ions

To

tal

Inve

stm

ent

trad

ing

T

reas

ury

Ass

et

man

agem

ent

Oth

er

oper

atio

ns

Tota

l

KD

’000

KD

’000

KD

’000

KD

’000

KD

’000

KD

’000

KD

’000

KD

’000

KD

’000

KD

’000

Seg

men

t ope

ratin

g in

com

e 51

,762

2,09

29,

843

5,64

169

,338

17,1

921,

248

6,68

95,

040

30,1

69

Seg

men

t ope

ratin

g ex

pens

es(5

,954

)(6

9)(6

07)

(1,9

93)

(8,6

23)

(3,0

68)

(457

)(6

73)

(1,8

23)

(6,0

21)

Segm

ent r

esul

ts45

,808

2,02

39,

236

3,64

860

,715

14,1

2479

16,

016

3,21

724

,148

Oth

er in

com

e 78

50

Una

lloca

ted

expe

nses

(7,5

54)

(4,6

27)

Net

pro

fitfo

rth

eye

ar

53,2

3919

,571

Oth

er in

form

atio

n

Seg

men

t ass

ets

197,

087

67,7

80-

35,2

0030

0,06

711

7,88

067

,730

-34

,749

220,

359

Una

lloca

ted

asse

ts5,

766

8,37

1

Tota

l ass

ets

305,

833

228,

730

Seg

men

t lia

bilit

ies

-11

0,08

0-

4,68

611

4,76

695

,506

--

3,51

199

,017

Una

lloca

ted

liabi

litie

s16

,181

7,74

4

Tota

l lia

bilit

ies

130,

947

106,

761

Cap

ital e

xpen

ditu

re15

545

Dep

reci

atio

n of

pro

pert

y an

dequ

ipm

ent a

nd

amor

tizat

ion

of i

ntan

gibl

e as

sets

1,

022

77

0

Oth

er n

on-c

ash

expe

nses

461

385

40

33- COMPARATIVE FIGURES

Certain prior year figures have been reclassified to conform to the current year’s presentation.

41

2 0 0 5ANNUAL REPORT