Resolute and Robust, the date palm tree

is more than just a tree. It is a symbol of

vitality and prosperity.

It is beauty and elegance. It is possibility

and potential. Known to withstand the
harshest of climates, the date palm tree
symbolizes achievement – a true symbol
of confidence and success.

Annual Report 2009

Taking Stock
...Embracing Possibilities

Understanding the challenges of the industry and focusing

on the possibilities ahead, Al Salam Bank-Bahrain strides
on keeping pace with the rapid changes. We will maintain
an innovative yet cautious approach as we anticipate a
wide spectrum of opportunities in the coming years. The
new world order with the changing market dynamics has
necessitated a pro-active and responsive attitude – an
inherent characteristic of our people who underpin the
corporate strategy and the promise of deliverance made.

As we project into the future, we stride ahead constantly

refining our action plans underlining our strategy to
satisfy our customers and shareholders. It is all about
taking stock with confidence and embracing possibilities
of the future. A parallel we have drawn with the date palm
tree, a natural phenomena of the region.
 His Royal Highness His Majesty His Royal Highness
Prince Khalifa bin Salman King Hamad bin Isa Prince Salman bin Hamad
Al Khalifa Al Khalifa Al Khalifa
The Prime Minister of the The King of the The Crown Prince &
Kingdom of Bahrain Kingdom of Bahrain Deputy Supreme Commander
 Contents

6 Corporate Overview

7 Annual Highlights

8 Board of Directors

14 Fatwa and Shari’a Supervisory Board

16 Executive Management Team

20 Board of Directors’ Report to the Shareholders

24 Message from the Chief Executive Officer

26 Management Review of Operations & Activities

32 Corporate Governance

36 Risk Management and Compliance

40 Corporate Social Responsibility

42 Fatwa and Shari’a Supervisory Board Report to the Shareholders

44 Independent Auditors’ Report to the Shareholders

45 Consolidated Financial Statements

52 Notes to the Consolidated Financial Statements

 Our Vision & Mission

Our Vision

To become a regional force in the Islamic financial

services industry by providing differentiated Shari’a
compliant products to focused segments.

Our Mission

• Become a “one-stop-shop” for Islamic financial

services.

• Create a strong onshore presence in select

countries.

• Develop a premier brand image as an Islamic

financial shaper.

• Achieve high returns for stakeholders based

upon their specific risk appetites.
 Corporate Overview

Headquartered in the Kingdom of Bahrain, Al Salam Bank-Bahrain (B.S.C.) is a dynamic, diversified and
differentiated Islamic bank.

Key factors that contribute to the Bank’s distinct market differentiation include:

• Strong paid-up capital base;

• Pre-eminent founding shareholders;
• High-caliber management team;
• State-of-the-Art IT infrastructure;
• Universal business model covering deposits, financing and investment services;
• Innovative, tailor-made Shari’a-compliant solutions;
• Firm commitment to corporate and social responsibility;

Incorporated on 19 January 2006 in the Kingdom of Bahrain and commenced commercial operations on 17
April 2006, the Bank operates under Shari’a principles in accordance with regulatory requirements for Islamic
banks set by the Central Bank of Bahrain.

Al Salam Bank-Bahrain was listed on the Bahrain Stock Exchange on 27 April 2006, and subsequently on
the Dubai Financial Market on 26 March 2008. The Bank’s high-caliber management team comprises highly
qualified and internationally-experienced professionals with proven investment expertise in key areas of
banking, finance and related fields; all supported by a world-class Information Technology (IT) infrastructure
and the latest ‘smart’ working environment. In 2009, the Bank acquired a 90.31% stake in Bahraini Saudi
Bank BSC. In just 3-years of establishment the Bank has a network of 8 branches and 16 ATMs in the Kingdom.
Established with a paid-up capital of BD120 million, the Bank’s total equity has crossed circa BD202 million
(US$540 million) with total assets crossing the US$2 billion mark.

Al Salam Bank-Bahrain is committed to adopting internationally recognized standards and best practices in
Corporate Governance and operates with highest levels of integrity, transparency and trust.

The Bank is committed to its role as a concerned corporate citizen, actively seeking ways to contribute and add
value to the social and economic well-being of the local communities in which it invests and operates.

6 AL SALAM BANK-BAHRAIN
 Annual Highlights

Key Financial Indicators

USD 2,085

USD 1,471

USD 1,055
USD 63.5

USD 99.7

USD 86.8

USD 37.0

USD 67.8

USD 61.4
BD23.9

BD37.6

BD32.7

BD14.0

BD25.5

BD23.1

BD786

BD554

BD398
2009 2008 2007 2009 2008 2007 2009 2008 2007

Total Operating Income (million) Net Profit (million) Total Assets (million)
BD201.8

BD172.5

BD159.5
USD 535.2

USD 457.5

USD 423.0

40.6%

31.3%

28.9%
10.7

21.3

19.3

2009 2008 2007 2009 2008 2007 2009 2008 2007

Total Equity (million) Earnings Per Share Cost to Income Ratio

AL SALAM BANK-BAHRAIN 7
 Board of Directors

H. E. Mohamed Ali Rashid Alabbar

Chairman

Mohamed Ali Alabbar is the founding member and Chairman of

Emaar Properties PJSC, the Dubai-based global property developer.
He serves on the board of directors of the Investment Corporation of
Dubai (ICD), the investment arm of the Government of Dubai. He is
also a Board Member of Noor Investment Group, an affiliate of Dubai
Group, focused on Shari’a compliant financial services. A graduate
in Finance and Business Administration from Seattle University in
the United States, Mr. Alabbar works closely with regional NGOs,
and is especially committed to the cause of educational reform and
social housing. A keen sportsman, he is Chairman of the UAE Golf
Association.

Habib Ahmed Kassem

Vice Chairman

Mr. Habib Kassem is the Chairman of Almahd Investment Company,

Bahrain Ferro Alloys, Bahrain Electricity Supply & Transmission
Company, Capital Growth Management and Quality Wire Products
Company. He is also the Chairman of Almahd Day Boarding School.
Mr. Kassem was Minister of Commerce and Agriculture, Kingdom of
Bahrain from 1976 to 1995, and Member of the GCC Consultative
Council for the Supreme Council from 1997-2007.

8 AL SALAM BANK-BAHRAIN
Essam bin Abdulkadir Al Muhaideb
Director

Essam Al Muhaideb is the Group Managing Director of A.K. Al

Muhaideb & Sons Group, and Board of Directors member in several
organizations having interests in banking & insurance, FMCG &
retail, building & construction, industrial, real estate apart from
educational, charitable and benevolent organizations. Emmar Middle
East, United Sugar Company, Amwal Al Khaleej, Saudi Tabreed
Company, Synthomer Middle East, Nestle Co, Damas Co , Al Oula
Real Estate Development Co, Dubai Contracting Company (DCC), Al
Salam Bank, Gulf Union Insurance Company, Al Massa International
Inc-Canada, Dnata Kuwait, Saudi Fisheries company, Aziziah Panda
United Co, Savola Foods Co, Al Latifia Trading & Contracting Co.
Moreover, he is a member in some of charitable and non profitable
organizations such as King Fahad University of Petroleum & Minerals
Endowment Fund, Prince Sultan Ladies’ Fund.

H.H. Shaikha Hessa bint Khalifa bin Hamad Al Khalifa

Director

An active member of the royal family of the Kingdom of Bahrain,

Shaikha Hessa gained her Bachelors degree in Management (1998),
and her Masters degree in Social Policy and Planning (2002) both
from the London School of Economics and Political Science. She is
an alumnus of Young Enterprise, Junior Achievement in the UK and
joined the Supreme Council for Women in 2001 as a member of the
Social Committee. Since 2004 she has been a Permanent Member of
the Council’s Board. In 2005, she founded inJAz Bahrain which is an
international organization to inspire and prepare young Bahrainis to
succeed in a global economy and is presently its Executive Director.
With her experience and active role in enterprise education and
developing skills of young women, she has been invited as speaker
and panelist at various occasions including the Supreme Council for
Women in the UN at the 49th session, the WEF regional meeting in
2005 and the Global Leadership conference in UAE in 2006.

AL SALAM BANK-BAHRAIN 9
 Board of Directors (continued)

Mr. Salman Saleh Al Mahmeed

Director

Mr Salman Al Mahmeed is the Deputy Chief Executive Officer of

Bahrain Airport Services, the Deputy Charmin of Dar Albilad, the
Managing Director and Owners’ Representative of Global Hotels,
Global Express and Movenpick Hotel in Bahrain. He was a Board
Member of Bahraini Saudi Bank as well as being a member of its
Investment, Executive and Strategic Options Committees. He was also
the Investment Director of Managa Holdings. Mr Al Mahmeed holds
an MBA in Business Administration, Master in Hotel Management
and BSc degree in Administration from Cairo University.

Sheikh Abedlelah Mohammed Saleh Kaki

Director

Sheikh Abedlelah M.S. Kaki has more than 35 years experience

in banking, trading & industry. He is the Chairman of Saudi
International Trading & Marketing Ltd. AMK Gulf For Investments
& International Agencies Co. Ltd. and United Gulf Industries Ltd in
Saudi Arabia, Marsh Saudi Arabia Insurance & Reinsurance Broking,
Marsh Insurance Consulting Saudi Arabia. He is also the Chairman
of Noubaria Seed Production Co, Nile Company For Development
& Tourism & Real Estate Investment, Tanta Flax & Oil Co, SAE and
Mediterranean Agricultural Products Co (MAPCO) in Egypt. He
is an active board member in several Egyptian Companies; Saudi
Corporation for Arab Investment SAE, Egyptian Saudi Investment
Tourism & Real Estate Co, Lacto Misr Co and Dynarabia Co Ltd, Al
Jouf Cement Company in Saudi Arabia. Mr Kaki is a graduate in
Economics from United States International University in California,
United States of America.

10 AL SALAM BANK-BAHRAIN
Mr. Fahad Sami Al Ebrahim
Director

Mr. Fahad S. Al-Ebrahim, with more than 9 years of professional

experience, is currently the Vice President - Regional Client
Relationship of Global Investment House (GIH). He is a Board
Member of Al-Mazaya Holding Company in Kuwait and a Board
Member of First Securities Brokerage Company S.A.K. Mr. Al Ebrahim
has established one of the leading wealth management groups
specialized in looking after the international clients who are looking
for exposures towards the Middle East and North Africa region. Prior
to joining GIH, Mr. Al-Ebrahim worked in the Kuwait News Agency
on the English News Desk. He is a graduate from the University of
Oregon with an emphasis in communication studies and holds a
post-graduate degree in business administration from the Maastricht
School of Management.

Mr. Hamad Tarek Alhomaizi

Director

Mr. Hamad Tarek Alhomaizi has a BS in Computer Science and

Business Administration from George Washington University and
has a strong IT background and technical understanding of web
technologies. He has varied experience in a number of areas
including direct investments, hedge funds, real estate and startup
businesses. He has worked in various capacities from Board level
to analyst in various companies and was a founding Board Member
in companies including Shuwaikh Real Estate Projects Company
(Kuwait), Ishraq Real Estate Company (Bahrain / UAE) and Al Shaab
Holding Company (Kuwait).

AL SALAM BANK-BAHRAIN 11
 Board of Directors (continued)

Mr. Ahmed Jamal Jawa

Director

A graduate in Business Administration with an MBA from the University

of San Francisco, Mr. Ahmed Jawa has served on the boards of the
Novapark Swiss Hotel Group; Mirapolice, an entertainment company
that builds theme parks in France; and Tricon Group, a US based
securities trading firm. Mr. Jawa is President, CEO and Board Member
of Starling Holding Ltd, a global investment group that deals with
private equity and direct investments world-wide. He is also President
of Contracting and Trading Company (CTC), a Saudi Arabian firm that
oversees investment opportunities and options in the GCC region and
the Middle East. Mr. Jawa has also been honored as one of the Global
Leaders of tomorrow by the World Economic Forum in February 2006.

Mr. Terence D. Allen

Director

Mr. Allen has more than 40 years of experience in the treasury

and investment banking business. He is the founder and Managing
Director of Allied Investment Partners PJSC. He has spent several
years in the private fund management business, where he was a
Director of several asset and fund management companies. In the
past he has been appointed as advisor and consultant to several
regional governments and institutions. He is a Qualified Arbitrator for
the GCC. He is the author of several books and frequently produces
articles for newspapers and journals ranging from military history to
financial and banking topics.

12 AL SALAM BANK-BAHRAIN
 Yousif Abdulla Taqi
Director & Chief Executive Officer

A Certified Public Accountant (CPA), Mr. Taqi has been active in the
banking and financial services industry since 1983. During his career,
Mr. Taqi worked in leading positions for a number of institutions in
the Kingdom of Bahrain. Prior to joining Al Salam Bank-Bahrain, he
was Deputy General Manager of Kuwait Finance House (Bahrain),
and was responsible for establishing Kuwait Finance House Malaysia.
Before this, Mr. Taqi spent 20 years with Ernst & Young, during
which time he provided professional services for many regional and
international financial institutions. During his career with Ernst &
Young, Mr. Taqi was promoted to Partner, responsible for providing
auditing and consultancy services to the Islamic financial firms. He
is currently the Chairman of Manara Developments Company B.S.C.
(c), Amar Holding Company B.S.C. (c) and ASB Biodiesel (Hong
Kong) Limited, affiliates of ASBB, and also a board member of Al
Salam Bank-Algeria and Aluminum Bahrain (ALBA).

Secretary to the Board

Khalid Ahmed Abdulla Al Ashar

Mr. Al Ashar holds a BSc in Commerce and Business Administration

from Beirut Arab University. He previously worked in the Operations
Department at the Bank of Bahrain and Kuwait and Arab Banking
Corporation. He also held the position of Director of Human
Resources and Administration at the Liquidity Management Centre.
He enjoys a long experience in the field of establishing Islamic banks
and contributed in the establishment of the Liquidity Management
Center.

AL SALAM BANK-BAHRAIN 13
 Fatwa and Shari’a
Supervisory Board

Dr. Hussain Hamid Hassan

Chairman

Dr Hassan holds a PhD from the Faculty of Shari’a, Al Azhar University, Cairo, Egypt; and a Masters in
Comparative Jurisprudence and Diploma in Comparative Law (both of which are the equivalent of a PhD)
from the International Institute of Comparative Law, University of New York, USA. He also holds a Masters
in Comparative Juries, and Diplomas in Shari’a and Private Law, from the University of Cairo; and an LL B in
Shari’a from Al Azhar University. He is the Chairman and member of the Shari’a Supervisory Board in many
of the Islamic Financial Institutions. In addition, Dr. Hassan is Chairman of the Assembly of Muslim Jurists,
Washington, USA; a member of the European Islamic Board for Research & Consultation, Dublin, Ireland; and
an Expert at the Union of Islamic Banks, Jeddah, Kingdom of Saudi Arabia.

Dr. Ali Mohuddin Al’Qurra Daghi

Member

Dr. Al’Qurra Daghi holds a PhD in Shari’a and Law, and a Masters in Shari’a and Comparative Fiqh, from
Al Azhar University, Cairo, Egypt. He also holds a BSc. in Islamic Shari’a from Baghdad University, Iraq; a
certificate of traditional Islamic Studies under the guidance of eminent scholars in Iraq; and is a graduate of
the Islamic Institute in Iraq. He is currently Professor of Jurisprudence in the faculty of Shari’a law and Islamic
Studies at the University of Qatar. He sits on the Boards of Shari’a Supervisory Boards for several banks and
financial institutions. Dr. Al’Qurra Daghi is also a member of the Islamic Fiqh Academy, the Organisation of
Islamic Conference, the European Muslim Council for Efta and Researches, the International Union of Muslim
Scholars, and the Academic Advisory Committee of the Islamic Studies Centre, Oxford University, UK. He
also has published several research papers tackling various types of Islamic Finance, Islamic Fiqh, Zakah and
Islamic Economy.

14 AL SALAM BANK-BAHRAIN
Shaikh Adnan Abdulla Al Qattan
Member

Shaikh Adnan Al-Qattan holds Masters degree in the Quran and Hadith from the University of Um Al-Qura,
Makka, Kingdom of Saudi Arabia; and Bachelor’s degree in Islamic Shari’a from the Islamic University,
Madeena, Saudi Arabia. Shaikh Al Qattan is also a Judge in the Shari’a Supreme Court, Ministry of Justice –
Kingdom of Bahrain. Shaikh Al Qattan is a Member of Shari’a Supervisory Boards for several Islamic banks and
he is also Chairman of Al Sanabil Orphans Protection Society, Chairman of the Board of Trustees of the Royal
Charity Establishment under the Royal Court - Kingdom of Bahrain, and President of the Kingdom of Bahrain
Hajj Mission. In addition, he is a Friday sermon orator at Al-Fatih Grand Mosque. Shaikh Al Qattan contributed
to drafting the Personal Status Law for the Ministry of Justice and is a regular participant in Islamic committees,
courses, seminars and conferences.

Dr. Mohamed Abdulhakim Zoeir

Member & Secretary to the Board

Dr. Zoeir holds PhD in Islamic Economy; Masters degree in Islamic

Shari’a (Economy); Bachelor’s degree in Management Sciences; and
a Higher Diploma in Islamic Studies. He is Member of the Fatwa
Board in a number of Islamic financial institutions and has 18 years
experience with Egypt Central Bank. Dr. Zoeir was also the Head of
Shari’a compliance in Dubai Islamic Bank.

The date palm tree yields at

least 1,000 pounds of fruit a
year. The trees are planted in
uniform rows and grow to be
40 to 100 feet tall. The date
palm tree begins producing
fruit when it is about seven
years old and sustains abundant
yields on average for 75 years,
although the tree itself may live
to be 150 years old

AL SALAM BANK-BAHRAIN 15
“And we have made therein gardens of date-palms and grapes,
and we have caused springs of water to gush forth therein”
(The Noble Qur’an, Surah YaSin, Verse 34)
 Board of Directors’ Report
to the Shareholders

The Directors of Al-Salam Bank-Bahrain B.S.C. (“the Bank”) have the

pleasure in submitting their report to the shareholders accompanied by
the consolidated financial statements for the year ended 31 December
2009.

The consolidated financial statements comprise the financial

statements of the Bank and its subsidiary, Bahraini Saudi Bank BSC
(together known as “the Group”).

Fiscal year 2009 proved to be very challenging; yet the third full year of
commercial operations had been successful representing your Bank’s
fourth profitable period since its inception in April 2006. The Group’s
total assets reached BD785.9 million, surpassing the US$ 2 billion
mark, with a net profit of BD 14 million (US$ 37 million) for 2009.

The year under review saw the extension of credit and liquidity crunch experienced in the latter half of 2008
with fears of a double dip recession. In spite of extremely adverse market conditions, the Group managed to
post a massive growth in total assets from BD554.5 million (US$1.47 billion) at 31 December 2008 to BD785.9
million (US$2.1 billion), an increase of BD231.4 million or 42% over 31 December 2008. This is largely due
to the Bank’s successful acquisition of a 90.31% stake in Bahraini Saudi Bank B.S.C. (BSB), a locally listed
commercial bank in Bahrain. On the income side, the adverse business climate prevented planned exits of
available for sale investments resulting in a 45% lower net profit. Whilst the gross operating income declined
by 36% prudent cost management resulted in significant cost savings of 17% over corresponding figures for
2008.

The directors believe that to be a successful financial institution, the Group needs to build on its network
within Bahrain, start on regional strategic expansion across the GCC and seriously consider venturing into
family Takaful business to be able to offer a complete suite of Islamic financial services to its customer base. To
this end, the Bank successfully acquired a 90.31% stake in BSB through a share exchange offer and expanded
its branch and ATM network within Bahrain to 8 branches and 16 ATMs, respectively. This acquisition marked
a major milestone in the history of your Bank which is actively seeking to identify similar opportunities to
support inorganic growth and achieve its vision of becoming one of the largest Islamic financial institutions in
the region. The Board and executive management are ambitious in positioning the Group as the largest Islamic
bank in Bahrain in the coming years.

The directors have resolved to maintain BSB’s corporate legal status in the near future, so the Group could
dedicate BSB to focus and complement the Group on Islamic retail and commercial banking operations in
the Kingdom. Through this acquisition, the Group has created visibility in Bahrain and is enhancing its service
delivery capabilities to small and medium sized clients through BSB, whilst the parent Bank is focussing
on serving the large corporate, high net worth and ultra high net worth clients. Such an approach will not

20 AL SALAM BANK-BAHRAIN
compromise on the Group’s service levels to its customers since the Bank had been successful in obtaining
the Central Bank of Bahrain’s (“the CBB”) approval to offer services to the Group’s customers throughout its
network. This means that regardless of where the customer established their accounts they will be able to
operate their accounts throughout the entire Group’s branches.

During 2009, the Bank exercised extreme prudence in entering into new financing and investment transactions
in order to preserve liquidity and bring only offerings that are backed by dependable cash flows. This is reflected
in a modest 22% growth in the financing portfolio as the management has been watching the market conditions
and the credit environment with a commitment to move away from real estate and create a diversified financing
portfolio. On the investments side, the acquisition of a stake in Milton Gate, a trophy asset domiciled in
Central London with a financially sound and established tenant is a testimony of your Bank’s commitment to
bring only solid transactions to its client base. The Bank concluded the transaction in June 2009 and placed
a majority stake with its investors at a running yield of 10% per annum paid quarterly. This deal also resulted
in the Bank winning the International Real Estate Financing Summit (IREFME 2009) Award of Excellence for
Outstanding Achievement in Islamic Real Estate Product Innovation. The marketing and sales of this transaction
was concluded in a span of less than one month with demand from investors outweighing the offering size.

On the treasury front, the Group continued to expand its financial institutions relationship network. At 31
December 2009 your Group was a net lender to the banking system to the tune of BD173 million (US$459
million). In addition, the Group invested in the CBB sukuk to the tune of BD33 million improving the financing
portfolio diversification and strengthening the liquidity position as they are eligible for repurchase by the CBB
in case of liquidity needs. Thus, the liquidity ratio of the Group remained extremely strong at 37.6%, net of due
to banks and excluding the CBB sukuk, meaning 37.6% of customer liabilities were maintained in liquid funds.
Throughout the fiscal year 2009, the executive management had been mindful of the need to be sufficiently
liquid to ensure that customer needs are met timely. Since inception of the Bank in 2006, the Bank continues
to be a net lender to the Banking system.

On the real estate sector front, anticipating strict regulations by the

CBB, the Bank had tightened its investment in and financing to the
real estate sector, and limited its exposure to 24% (31 December
2008: 30.0%) of its total assets. Given that there is a huge demand
of dwelling units that are affordable, the Bank is committed to
undertaking a role with the support of the Government of Bahrain
in developing affordable housing solutions with a launch targeted in
the later half of 2010. The Board and management are conscious of
the need to check the Bank’s concentration to the real estate sector
and hence new businesses in this sector are being undertaken on a
selective basis to take advantage of market opportunities and bearing
in mind investor’s cash yield expectations.

The Directors believe that recent challenges facing the banking Palm trees are evidence of
sector will continue into 2010 and the Group is no exception to
these challenges however, with a strong and growing deposit base god’s glorious creation and
and a robust risk management framework, we are confident that your grace as its fruit varies in its
Group is poised to outperform its peers in the medium to long term taste and type whilst the tree
and to establish itself as a model for a universal Islamic bank.
remains one of its kind.
In the Extraordinary General Assembly Meeting held on 4 May 2009,
the shareholders approved the Bank’s proposal to acquire up to 100%
of the issued and fully paid up ordinary shares of BSB, consisting of

AL SALAM BANK-BAHRAIN 21
 Board of Directors’ Report
to the Shareholders (continued)

500,000,000 ordinary shares. The shareholders also approved an increase of the authorized share capital of your
Bank from 1,200,000,000 shares of nominal value BD 0.100 each to 2,000,000,000 shares of nominal value
BD 0.100 each. Following acquisition of a 90.31% stake in BSB, the Bank issued 225,775,075 ordinary shares
to shareholders of BSB who accepted the Bank’s offer thereby increasing the paid up shares to 1,425,775,075
shares.

Meanwhile, in the Extraordinary General Assembly Meeting held on 12 November 2009, the shareholders
resolved to increase the number of the Bank’s Board of directors to fourteen and have also endorsed the Board’s
recommendation to raise funding through the issuance of sukuk. Following this resolution, the Board of the
Bank was expanded by two members and as resolved at the EGM held on 4 May 2009 invited two members
from amongst the BSB shareholders who accepted the Bank’s share exchange offer. Today, we are privileged to
have Sheikh Abedlelah Mohammed Kaki and Mr Salman Saleh Al Mahmeed as part of the Board of Directors.
Furthermore, the shareholders also resolved to amend the articles of association of the Bank to pass the Bank’s
obligation to pay Zakah from the earnings on to the shareholders effective 1 January 2009. These resolutions
were implemented by the Bank.

Financially, fiscal year 2009 had seen a decline in net profit from BD25.5 million in 2008 to BD14 million in
2009, representing a return on equity of 7.6% (2008:16.1%). The gross operating income amounted to BD23.9
million (2008: BD37.6 million) and the operating expenses were BD9.4 million (2008: BD11.8 million). The
reduction in the operating expenses is attributable to prudent cost management. The cost-to-income ratio for
the year was 40.6% (2008:31.3%). The earnings per share (EPS) for the year amounted to 10.7 fils (2008: 21.3
fils). The directors have recommended cash dividend of 5 fils per share or 5% of the paid-up capital with a
further 5% of the paid-up capital as bonus shares subject to shareholders’ approval in the forthcoming Annual
General Meeting.

Retained earnings and appropriation of net income:

BD’000
Balance at beginning of the year 12,575
Net profit for the year - 2009 13,960
Transfer to statutory reserve (1,396)
Transfer to investment reserve (5,772)
Stock dividend (7,129)
Proposed dividends (7,129)
Charitable contributions (100)
Balance at end of the year 5,009

22 AL SALAM BANK-BAHRAIN
Directors’ and senior management interest:
As required by the Central Bank of Bahrain rule book set out below are the interests of Directors and Senior
Managers in the shares of Al Salam Bank-Bahrain B.S.C. and the distribution of the shareholdings as of 31
December 2009.

31/12/2009
Directors' shares 118,414,178
Senior Managers' shares 4,208,812
122,622,990

Directors’ remuneration, fees and expenses for attendance at Board meetings for 2009 amounted to BD250,000
(2008: BD 320,000).

Shareholding Schedule:
2009 % of total
No. of Outstanding
No. of shares Shareholders shares

Percentage of shares held

Less than 0.5% 658,205,954 23,248 46.2
0.5% to less than 1% 264,097,908 25 18.5
1% up to less than 5% 362,504,950 15 25.4
Over 5% 140,966,263 1 9.9
Total 1,425,775,075 23,289 100.00

% of
Nationality Holdings

Shareholders holding >5% Shares:

Global Mena Macro Fund Company B.S.C. Bahrain 9.9

The Directors would like to express their appreciation to the leadership and ministries of the Kingdom of
Bahrain, the Central Bank of Bahrain, correspondents, customers, shareholders and employees of the Bank
for their support and collective contribution since the establishment of the Bank and we look forward to their
continued support in the fiscal year 2010.

15 February 2010 Mohamed Ali Rashid Alabbar

Manama, Kingdom of Bahrain Chairman

AL SALAM BANK-BAHRAIN 23
 Message from the
Chief Executive Officer

At the outset, I am pleased to highlight that the Bank had its fourth
consecutive profitable year since its inception in 2006. The gross
operating income stood at BD35.18 million (BD51.91 million in
2008) and the net profit for the year was BD13.96 million (BD25.54
million in 2008). The balance sheet size shows an impressive growth
of 41.74% over the previous period and has now crossed over the
US$2 billion mark (BD785.93 million).

The results and the increase in the balance sheet size has been achieved
in a year that has been a very challenging period for the regional and
world economy. It has been the most testing year since our formation
and the notable performance is attributable to the prudence and
insight of ASBB management in the areas of asset growth, liquidity
deployment and cost management.

ASBB’s business model in the past had been biased towards investments. In order to strengthen the retail/
commercial banking activity, the banks’ executive management, with the approval of the Board launched its
initiative in 2009 to seek suitable retail/commercial banking targets for acquisition. The result of this strategic
initiative is the acquisition of Bahraini Saudi Bank resulting in significant addition to the branch and ATM
networks of the bank.

The liquidity ratio as of 31 December 2009, after netting interbank liabilities, stood at 37.60% (50% in 2008).
Our capital adequacy ratio has increased to 28.60% as of 2009 (compared to 24.70% as of 2008). This puts us
amongst the strongest capitalized banks and provides an ideal platform to benefit from an anticipated recovery
in regional and global economies and markets.

Our core businesses lines, Banking and Investments groups experienced a very successful year. In 2009, there
was significant growth in the interbank placements and deposits of the Group. Customer deposits increased
to BD458.97 million as of 31 December 2009 from BD338.36 million as of 31 December 2008, an absolute
increase of 35.64%. The healthy growth reflects the confidence of the customers and the counterparties in
our bank and its management. While being extremely cautious in building assets, the overall Islamic financing
facilities grew moderately by BD24.96 million compared to 2008.

24 AL SALAM BANK-BAHRAIN
The Wealth Management Group was able to place a majority stake
of the Bank’s investment in Milton Gate, a prime office building in
the UK, with our clients in record time. During the year the Bank
has signed an agreement with a large business investor in Brunei to
be a 50% partner in our leasehold interest in Burj Al Safwa, Mecca.

The Retail Banking Department has launched an innovative Shari’a

compliant Takaful-principle-based credit card. To innovate and
upgrade its services to its customers, the Bank has introduced “Resala”
SMS notification service. As a part of providing new products to the
customers, the Bank has launched “Moteri” vehicle financing and
“Dari” property financing during the year.

Being a socially responsible institution and to contribute to the society

we live in, the Bank has contributed both in money and in kind to the
tune of about BD1 million to needy non-profit social organizations,
educational institutions and has helped many individuals for their
medical treatments.

I would place on record my appreciation to ASBB staff who have

been exercising diligence, skill and professionalism in discharging
their duties. I am also thankful to the Board and the regulators for
their strong support and constructive guidance in the areas of our
operation. Special thanks to the shareholders, customers and clients
for their continued support and confidence. As always, I note my
appreciation of the longstanding support of the Government of the
Kingdom of Bahrain and its leadership.

Yousif Abdulla Taqi

The Date palm tree rises up
high in the sky and produces
its dates if only pollinated.
If the top of it is chopped off
the rest of it dies in contrast
to other types of existing
trees which in many ways is
akin to the human brain that
influences human thinking.

AL SALAM BANK-BAHRAIN 25
 Management Review of
Operations & Activities

Operating environment
The decline in global economic activity triggered by the collapse of Lehman Brothers in late 2008 continued
throughout the year and had a severe impact on financial institutions in every market. The effect of the global
slowdown rippled through the region that witnessed the burst of the regional real estate bubble. Investors
withdrew from the market bringing the Sukuk and private equity investment activity to a standstill. Institutions
operating on high leverage for growth saw liquidity disappearing. The situation gave rise to an increased
number of distressed opportunities but with limited buyers especially in the real estate markets. This operating
environment had a negative impact on the asset values.

Business environment
While operating under difficult market conditions, the management remained focused on building a strong
balance sheet and improving the quality of assets. The Bank embarked on an inorganic growth strategy in order
to expand the customer base and improve customer reach. As a result, 90.3% of Bahraini Saudi Bank was
acquired through a share exchange offer during the year. The acquisition added six new branches and twelve
additional ATMs to the Bank’s network.

Financial performance
The management was actively engaged in protecting the balance sheet and focusing on asset quality amid the
general decline of asset values in both global and regional markets. The Bank remained profitable and recorded
its fourth consecutive profitable year since inception in 2006. The limited availability of high quality assets had
a negative impact on current year’s profitability. The net profit for the year declined to BD 13.9 million (BD25.5
million in 2008), a 45% decrease from 2008. The total operating income declined by 36% to BD 23.9 million
(BD 37.6 million in 2008).

Capital adequacy
The Bank’s capital adequacy continues to reflect a healthy ratio of 28.6% (24.7% in 2008) as of end of the fiscal
year against a regulatory requirement of 12% stipulated by the Central Bank of Bahrain under the new Basel II
framework that came into effect in 2008.

26 AL SALAM BANK-BAHRAIN
Asset quality
The total assets continued to grow during the year to BD 785.9 million and achieved an impressive 42% growth
over the previous year (BD 554.5 million in 2008) in a challenging operating environment. This significant
growth was mainly due to the acquisition of BSB during the year. Financing portfolio of the Bank expanded by
22% in spite of the management’s effort to seek acceptable risk/return profile . The combined equity increased
to BD 198.2 million (BD 172.5 million in 2008) reflecting the strength of the balance sheet.

The increase in equity is underpinned by the issue of 225.8 million new shares to BSB shareholders as part of
the acquisition process. Customer deposits increased by 36% to BD 459.0 million (BD 338.4 million in 2008)
providing the necessary liquidity.

Since inception, the Bank continues to be a net lender to the local banking system. The liquidity ratio (cash
and short term funds, less interbank liabilities, to customer liabilities) of the Bank reflected an extremely strong
37.6% (50% in 2008) at end of the fiscal year.

Profitability
In an environment where high net worth investors in the Middle East have seen substantial erosion of their
asset values, the Bank generated BD 11.8 million (BD 30.3 million in 2008) income through placement of high
quality assets where investor appetite remain strong. As a result of the growth in financing portfolio, income
of financing contracts increased to BD 16.7 million (BD 14 million in 2008). It should be noted that due to
extremely prudent credit assessment processes that are in place, provision was not required against assets.

Due to the focused efforts in controlling operating expenses, substantial cost savings of 17%, including
reduction of staff costs by BD 1.7 million, were achieved during the year.

Assets under management

The assets under management of the Bank grew by BD 35.7million during the year to BD 60.7 million (BD
25 million in 2008). This is a remarkable achievement by our wealth management team in a period where
investment appetite of high net worth individuals saw drastic reductions. This also reflects on the strength of
our placement franchise. The Bank has built a strong relationship with our investors over the short history of
the Bank by demonstrating our professional approach, unique and attractive investment opportunities and
personalized service.

Banking Group
The acquisition of Bahraini Saudi Bank strengthened our capacity to serve our customer base in the Kingdom.
Through the acquisition six new branches were added to the two existing branches of the Bank taking the total
number of branches to eight.

Similarly, the addition of twelve new ATMs located throughout all five Governorates significantly improved
services offered to our valued customer base. The total number of ATMs in the kingdom now stands at 16.
This new addition brings us a further step closer to our goal of being the “one stop shop” for Islamic banking
services. We will continue to improve our services in order to provide best in class retail and commercial

AL SALAM BANK-BAHRAIN 27
 Management Review of
Operations & Activities (continued)

banking products and services to our clients. We have been selective in our approach to building assets as we
aim to create a high quality asset portfolio, a sustainable client base and a strong local and regional presence.

While we continue to strengthen retail, corporate and private banking services, the Bank also offers tailored
products to the wealth management market segment. Our wealth management products are offered to investors
through a dedicated placement team who provide personalized services. The placement and relationship
professionals meet the investors frequently and assess their appetite and risk profile prior to offering any
customized solutions. The wealth management team successfully offered two new attractive investment
opportunities to accredited investors. In particular, restricted investment offer of Milton Gate, a prime office
building in the City of London with extremely strong tenant covenant which provides a 10% cash yield to
investors was fully subscribed in record time. During the year investors who participated in investment products
structured by the Bank across real estate, hospitality and private equity, acquired assets amounting to BD 35
million (BD 113 million in 2008).

The Bank successfully launched several new retail products in order to satisfy growing customer demand.
Dari, property acquisition financing which offers the flexibility of a long term repayment period, Moteri,
vehicle purchase financing are some of unique Islamic banking products that were introduced during the
year. In addition to these financing products, Step-Up Wakala program that was launched during the year was
extremely successful in raising medium term liquidity profile.

Investments
As in any other year, our private equity teams reviewed a large number of opportunities during the year.
However, due to the extremely cautious approach adopted by the management, Milton Gate was the only
new investment that was acquired in 2009. The investment in a prime city office building with strong tenant
covenant of ten plus years to a UK top 15 legal practice attracted significant investor interest demonstrating the
Bank’s ability to source attractive investment opportunities in tough market conditions.

In recognition of the innovative Shari’a complaint investment structure that was used to acquire the property,
the Bank was awarded the “Excellence for Outstanding Achievement in Islamic Real Estate Product Innovation”
at the International Real Estate Financing Summit.

The timing of the acquisition proved to be favorable as the valuation of prime commercial properties in the City
of London strengthened rapidly in the second half of the year. The investment provides a very attractive 10%
cash yield to our investors.

28 AL SALAM BANK-BAHRAIN
Our continuous efforts to provide unique Shari’a compliant investment opportunities to our customers require
us to follow a diligent process in selecting, acquiring and managing investments in our target markets. To this
end, we have put in place a robust investment process with multiple layers of controls involving several distinct
and independent functions within and outside the Bank.

The investment teams continue to work with the operating companies in offering advice and assistance in new
initiatives in order to focus on value preservation of our investments.

The Bank’s investment in a 1999 built Boeing 777-200ER aircraft leased to Malaysian Airline Systems Berhad
continues to meet investor expectations. The investment provides a cash yield of 9.5% per annum to investors
paid on a quarterly basis.

The development of the ASB Biodiesel plant in the Tseung Kwan O industrial area of Hong Kong is now progressing
according to the plan in spite of some challenges due to the performance quality of the main contractor. Due to
the Bank’s close involvement in post acquisition management of existing investments, we were able to identify
and contain the potential issues and a new contractor was introduced with minimal setbacks. The state-of-the-
art 100,000 MT plant will use waste cooking oil, grease trap waste, non pork animal fat and palm oil fatty acid
to produce environmentally friendly biodiesel, a sustainable, alternative energy for conventional diesel engines.
The plant is expected to be operational in early 2011.

The Bank’s USD 40 million investment across diversified asset classes in China has progressed and had been
able to maintain the overall investment values in spite of the economic down turn that experienced large fair
value declines across the private equity asset class. The underlying investment portfolio of the fund comprises of
significant minority stakes in agricultural business, food,
pharmaceutical, logistics, galvanized steel and industrial machinery.
The fund manager is targeting two IPOs in 2010 as the market for new
listings in China are set to improve.

Corporate Governance and Risk Management

The primary responsibility of the investment teams is to identify high
quality private equity and real estate assets through their regional
experience. These teams are dedicated to source, evaluate, acquire
and enhance value of these assets and seek potential exits.

All potential investment opportunities are analysed by the investment

Many hadiths were said
teams if they meet the basic investment guidelines set out by the Banks’
by prophet Mohammed
Investment Committee. The opportunities that satisfy these guidelines
(PBUH) about the favors and
are then subjected to an independent review by the investment generosities of palm trees,
Middle Office , a risk assessment, a legal review and a conceptual (PBUH) compared palm trees
Shari’a Board approval. The selected opportunities are presented to Muslims as it extends its
for Investment Committee approval. The Investment Committee blessings, shades and fruits
comprises of senior management from all business areas of the Bank. all the time. Dates are edible,
nutrient fresh and dried alike.

AL SALAM BANK-BAHRAIN 29
 Management Review of
Operations & Activities (continued)

Know Your Customer

As part of our continuous effort to provide innovative products and services to our customers, the Bank places
significant emphasis on understanding customer needs. Understanding their business activities and sources
of wealth is considered to be an integral part of this process of meeting and exceeding customer expectations.

The Bank complies with Financial Crimes Module of Central Bank of Bahrain’s rule book. This module contains
Bahrain’s current anti money laundering legislation developed under the directives of the Financial Action Task
Force which is the international organization responsible for developing global anti money laundering policies.

Human capital
Our human resource strategy is focused on building a high performance talent pool that is sustainable over a
long period of time with a diversified level of competence. In its short history, the Bank has been able to attract
and retain some of the best industry professionals in the region. We take pride in our 82.4% (80% in 2008) of
Bahraini employees in the total of 233 (124 in 2008) employees across all locations. Human resources pool of
the combined Bank doubled during the year as a result of the acquisition of Bahraini Saudi Bank.

The Bank recognizes that in order to motivate and retain the best talent, it is necessary to provide competitive
compensation based on individual and overall performance of the Bank. Annual performance reviews are
conducted to formalize individual strengths and training requirements are identified through continuous
interaction. In order to provide various training opportunities to employees to acquire and maintain a high
level of competency, the Bank invested BD 36,000 in 2009 (BD 110,000 in 2008). The employees across the
Bank received 5,380 hours (3,343 hours in 2008) of formal training through in-house and externally arranged
training programs.

The management maintains an open dialogue with employees to encourage transparency. Regular employee
events including an annual gathering to review the Bank’s performance and discuss future strategy forms part
of the social calendar. Workshops are organized to improve efficiency and increase productivity at workplace.
These social events encourage interaction among employees and foster their relationships outside working
hours.

30 AL SALAM BANK-BAHRAIN
 Corporate Governance

The Board is committed to establishing the highest standards in

Corporate Governance. To this end, it has established various
committees in line with industry best practice and has also directed
the senior management to establish various management committees
with relevant members. The Board Charter imposes the highest level
of ethical conduct; doing what it proclaims to be its responsibility;
reporting results with accuracy and transparency in a timely manner;
and ensuring full compliance with the by-laws and the rules and
regulations that govern the Bank’s business. The Board has adopted
a Board Charter, which together with the Bank’s Memorandum and
Articles of Association and the terms of reference of various Board
Committees, provides the authority and practices for governance of
the Bank.

The Board provides central leadership to the Bank. It has established

and defined the objectives and strategies that direct the ongoing
activities of the Bank to enable it to achieve its objectives. The roles
and responsibilities of the Board of Directors, their independence,
code of conduct and ethics are described in the Board Charter.

The palm tree is considered to

be one of the most adaptable
trees in the world. It requires
watering only once every two
weeks and is able to withstand
the dry, hot days and cold
nights of the harsh desert
climate.

32 AL SALAM BANK-BAHRAIN
The Bank is organized as follows:

SHAREHOLDERS

External Auditors Fatwa and Shari’a

Supervisory Board

Board of Directors

Executive Committee

Renumeration Committee

Audit Committee

Chief Executive Officer

Management Committees
• Risk / Credit Internal Audit Department
• Investment
• Asset Liability Shari’a Compliance
• Information Technology Department

BUSINESS GROUPS SUPPORT GROUPS

Banking Risk & Compliance

Investment HR, Operations, IT &

Support Services

Finance & Strategic

Treasury & Financial Markets Development

AL SALAM BANK-BAHRAIN 33
 Corporate Governance (continued)

BOARD COMMITTEES

Consistent with the industry’s best practice, the Board has established
three committees with defined roles and responsibilities. The
standing committees of the Board are the Executive Committee, the
Audit Committee and the Remuneration Committee.

Executive Committee
Has delegated authority within the overall Board authority. Provides
direction to the executive management on all business matters and
assumes the role of the Board to address matters arising between
Board meetings. The Committee is responsible for business
matters concerning credit and market risks, strategy review and
recommendation to the Board.

Audit Committee
Has a responsibility to assist the Board in discharging its oversight
duties relating to matters such as risk and compliance, including
the integrity of the Bank’s financial statements, financial reporting
process and systems, internal controls and financial controls. The
Committee also, acts as a liaison between the external auditors and
Since ancient times, the the Board and between the regulators and the Board.
date palm tree is known for
Bedouins in the deserts as a Remuneration Committee
source of Nutrition. One of the The role is to provide a formal and transparent procedure for
developing a compensation policy for the Chief Executive
oldest cultivated trees, it is said
Officer, senior management and rest of employees; ensures that
that the ancient Egyptians used compensation offered is competitive, in line with the market/peer
date palm leaves to symbolize group and consistent with the responsibilities assigned to employees.
longevity, fertility and utilize it The Committee approves policies covering hiring, compensation
and training. In addition, the Committee recommends to the Board
in their medicine and daily life
special compensation plans, including annual performance bonus
use. In the Gulf region people
and short/long term incentives, to attract, motivate and retain key
used its trunk in building their employees.
house roofs and the leaves for
basket weaving.

34 AL SALAM BANK-BAHRAIN
MANAGEMENT COMMITTEES

The Chief Executive Officer is supported by a number of management committees each having a specific
mandate to give focus to areas of business, risk and strategy.

The various committees and their roles and responsibilities are:

Committee Roles and responsibilities

Credit/Risk Committee Recommending the risk policy and framework to the Board. Its primary role
is the selection and implementation of risk management systems, portfolio
monitoring, stress testing, risk reporting to Board, Board Committees, Regulators
and executive management. In addition to these responsibilities, individual
credit transaction approval up to delegate limit and monitoring is an integral
part of the responsibilities.

Asset Liability Committee This Committee’s primary responsibility is to review the trading and liquidity
policy for the overall management of the balance sheet and its associated risks.

Investment Committee The role of the Committee is to review and approve all transactions related
to corporate and real estate investments and monitoring their performance
on an ongoing basis. In addition, the Committee is responsible to oversee the
performance of the fund managers and recommend exit strategies to maximize
return to its investors.

Technology Steering TSC oversees the information technology function of the Bank. It recommends
Committee the annual IT budget and plans, drawn up in accordance with the approved
strategy for the Bank, to the CEO for submission to the Board of Directors for
their approval. It supervises the implementation of the approved IT annual plan
within set deadlines and budgetary allocations.

Code of Conduct
The Bank conducts itself in accordance with the highest standards of ethical behavior. A Code of Business Conduct
has been developed to govern the personal and professional conduct of all stakeholders.

Compliance
The Bank has in place comprehensive policies and procedures to ensure full compliance with the relevant rules and
regulations of the Central Bank of Bahrain and the Bahrain Stock Exchange, the Dubai Financial Market, the Emirates
Securities & Commodities Authority including anti-money laundering, prudential and insider trading reporting.

Communications
The Bank conducts all communications with its stakeholders in a professional, honest, transparent, understandable,
accurate and timely manner. Main communications channels include annual reports, corporate brochure and
website, and regular announcements in the appropriate local, regional and international media and the internet.

AL SALAM BANK-BAHRAIN 35
 Risk Management
and Compliance

At Al Salam Bank-Bahrain we appreciate the fact that we are in the business of taking risks and our success is
largely dependent on how efficiently we identify, measure, control and manage these risks. Hence, we view
risk management as a core competency from a strategic point of view and the Basel II Accord as a catalyst to
the successful implementation of the pillars of risk management.

The fundamental principle underlying our risk management framework is ensuring that accepted risks are
within Board approved risk appetite and the returns are commensurate with the risks taken. The objective is
creating shareholder value through protecting the Bank against unforeseen losses, ensuring maximization of
earnings potential and opportunities vis-à-vis the Bank’s risk appetite and ensuring earnings stability.

With this in mind, the Bank’s establishment plan gave priority to the development of an effective and practical
risk management framework and independent risk management and compliance function in line with best risk
management practice locally and internationally, the requirements of the Central Bank of Bahrain and the Basel
II Accord.

RISK MANAGEMENT FRAMEWORK

The risk management framework defines the risk culture of Al Salam Bank – Bahrain and sets the tone throughout
the Bank to practice the right risk behavior consistently to ensure that there is always a balance between
business profits and risk appetite.

The risk management framework achieves this through the definition of the Bank’s key risk management
principles covering credit, market, operational, strategic and reputation risks, the role and responsibilities of
the Board, Risk Management group and Senior Management towards risk management, the risk assessment
methodology based on likelihood and consequences, the major risk policies, procedures and risk limits, the
risk management information systems and reports, the internal control framework and the Bank’s approach to
capital management.

The effectiveness of the risk management framework is independently assessed and reviewed through internal
audits, external audits and Central Bank of Bahrain supervision. In addition, business and support groups carry
out periodic control risk self assessments.

36 AL SALAM BANK-BAHRAIN
As a result, the risk management framework creates an alignment between business and risk management
objectives

RISK MANAGEMENT & CORPORATE GOVERNANCE FRAMEWORK

Board Committee
Fatwa and Shari’a Supervisory Board

Senior Management Committees

Risk Management & Compliance Function

Board & Senior Comprehensive Compliance &

Management Internal Control Anti-Money
Oversight Framework Laundering

Risk Assessment Methodology

Risk Policies, Capital Management
Risk Management
Procedures & Risk Adjusted
Systems
& Limits Pricing

Internal Audit, External Audit, Central Bank of Bahrain

CAPITAL MANAGEMENT

The cornerstone of risk management framework is the optimization of risk-reward relationship against the capital
available through a focused and well monitored capital management process involving Risk Management,
Finance and Business groups.

CORPORATE GOVERNANCE

The risk management framework is supported by an efficient Corporate Governance Framework discussed on
pages 32 to 35.

RISKS OWNERSHIP

The implementation of the risk management framework bank-wide is the responsibility of the Risk Management
& Compliance Departments. Ownership of the various risks across the Bank lies with the business and
support Heads and it is their responsibility to ensure that these risks are managed in accordance with the risk
management framework.

Risk Management assists business and support heads in identifying concerns and risks, identifying risk owners,
evaluating risks as to likelihood and consequences, assessing options for accommodating the risks, prioritizing
risk management efforts, developing risk management plans, authorizing implementation of risk management
plans and tracking risk management efforts.

AL SALAM BANK-BAHRAIN 37
 Risk Management
and Compliance (continued)

RISK MANAGEMENT AND COMPLIANCE ORGANIZATION

Al Salam Bank- Bahrain’s Risk Management and Compliance Departments are under the supervision of an
independent Chief Operating Officer with a direct reporting line to the Chief Executive Officer.

Board Approved Policies, Procedures and Limits

Credit Risk Market Risk Operational Risk Capital Compliance & Anti-
Management Management Management Management Money Laundering

• Exposures and limits • Positioning and Limits • Control Self • Basel II Compliance • Compliance
Monitoring Monitoring Assessments Monitoring
• Risk Adjusted Pricing
• Portfolio Management • Risk Measurement • Key Risk Indicators • Anti-money Laundering
Methodology Monitoring • Reporting to Board control
• Timely Reporting to Executive Committee
Risk Committee • Timely reporting to • Risk & Loss Events • Training and Awareness
ALCO Database • Scenario Analysis
• Internal rating • AML System Controls
Methodology • IT Security
Managements
• Periodic Stress Testing
and Scenario Analysis • Business Continuity
Planning

• Outsourcing Risk
Management

COMPLIANCE & ANTI-MONEY LAUNDERING UNIT

The Bank has established an independent and focused unit to coordinate the implementation of compliance
and Anti-Money Laundering and Anti-Terrorist Financing program. The program covers policies and procedures
for managing compliance with regulations, anti-money laundering, disclosure standards on material and
sensitive information and insider trading.

In line with its commitment to combat money laundering and terrorist financing, Al Salam Bank - Bahrain
through it’s Anti-Money Laundering policies ensures that adequate preventive and detective internal controls
and systems operate effectively.

38 AL SALAM BANK-BAHRAIN
The policies govern the guidelines and procedures for client acceptance, maintenance and monitoring in line
with the Central Bank of Bahrain and International standards such as FATF 40 + 9 recommendations and Basel
Committee papers.

All inward and outward electronic transfers are screened against identified sanction lists issued by certain
regulatory bodies including the UN Security Council Sanctions Committees and US Department of the Treasury
- OFAC, in addition to those designated by the Central Bank of Bahrain.

The compliance program also ensures that all applicable Central Bank of Bahrain regulations are complied
with and/or non-compliance is detected and addressed in a timely manner. The program includes compliance
with regulations set by Ministry of Industry & Commerce and Bahrain Stock Exchange.

The date fruit of the tree is a

great source of iron, potassium,
calcium, magnesium, sulphur,
copper and phosphorous.
Dates are also rich in natural
fibers and contain many
vitamins such as thiamine,
riboflavin, biotin, folic and
ascorbic acid. Dates are used
to make syrups, jams, ice
creams, soft drinks and a host
of other products.

AL SALAM BANK-BAHRAIN 39
 Corporate
Social Responsibility

Since its inception, social responsibility formed a priority for Al Salam Bank–Bahrain. The Bank adopts a
very balanced policy to contribute to the social and economic well-being of the communities in which it
operates. The Bank focused on several educational initiatives such as the donations towards the Crown Prince
International Scholarship Program and to the Royal Charity Organization in support of university scholarships
for distinguished students, as well as funding “Al Salam Center for Financial Studies” at the University of
Bahrain.

Education is not the only area the Bank looks into, it also considers the social aspects of the Bahraini society
where the Bank can be of an added value to bond the local community. This year, the Bank decided to give
charitable organizations gift vouchers on Ramadan’s eve to needy & poor. It also supported Al Hidaya Center in
their community awareness campaign and funded Bahrain Student Funds Foundation in addition to financing
two small projects at Asma School.

The human side has never been neglected by the Bank for it believes in human capital value. In this regard
the Bank sponsored the medical treatment of several patients and donated to several social organizations such
as the Friendship Society for the Blind, the Bahrain Society for Children with Behavioral Difficulties and Um
Al-Darda Centre.

Al Salam Bank adopts a policy that supports training and employment. Bahrainis accounted for 82.4% of all
employees at the end of 2009. Also in 2009, the Bank carried out its Summer Internship Program, for the third
consecutive year, with more than 30 Bahraini university students who were enrolled into the Bank’s training
plan aimed at enhancing students’ knowledge of Islamic banking industry.

In addition, the Directors have recommended the allocation of BD 100,000 in charitable donation to aid
various aspects of the social activities to enhance the quality of life for everyone, through its support for
charitable, educational, medical, scientific, cultural, social, sporting and environmental organizations.

40 AL SALAM BANK-BAHRAIN
Consolidated
Financial Statements
Al Salam Bank-Bahrain
completed its fourth fiscal period in 31
December 2009 successfully, a year
that proved to be very challenging for
the regional and global economy.
 Fatwa & Shari’a
Supervisory Board Report
to the Shareholders
for the Financial Year Ended 31 December 2009

The Fatwa and Shari’a Supervisory Board (“the Board”) has reviewed the transactions entered into by the Bank
during the year. The Board had a look at the balance sheet, the income statement, and the trial balance. The
Board has arranged a meeting with the management of the Bank and presented to it its annual report as follows:

First:
1- The Board has supervised the Banks activities and transactions
during the year. The Board had played its role in guiding various
departments to the adherence to the Principles of Shari’a and the
pronouncement of the Shari’a Fatwa and Supervisory Board in
respect to these activities and transactions. The Board held, for this
purpose, several meetings with the Bank’s management. The Board
is hereby emphasizing the Bank’s management utmost keenness to
observe the Rules and Principles of Shari’a and pronouncement of
the Fatwa and Shari’a Supervisory Board.

2- The Board has examined the transactions that were presented to it

during the year, and approved contracts and documents relating to
these transactions. The Board has responded to questions and queries
raised in respect to these transactions, and issued appropriate Fatwas
and pronouncements. These decisions have been circulated to the
concerned department for execution.

Recent studies have shown that Second:

people who consume dates on a The Board has reviewed a sample of contracts and agreements that
regular basis show an extremely were presented to it and requested the management to fully comply
with these contracts and agreements.
low incidence rate of cancer
and heart disease. Some of Third: Consolidated Financial Statements:
the medicinal uses include the The Board has reviewed the consolidated financial statements of
treatment of bronchitis, tumors, the Bank and all relevant notes attached thereto and clarifications
hemorrhoids, poisonous bites, complementary to it, after which the Board made its observations
and recommendation.
night blindness, skin allergies,
anxiety, depression and many
others.

42 AL SALAM BANK-BAHRAIN
The view of the Board is as follows:

1- In line with the available information and disclosures that are presented by the Bank’s management, the
consolidated financial statements reviewed by the Board represent the Bank’s assets and revenues. The accuracy
of the information and data provided are the responsibility of the Bank’s management.

2- The Bank’s management stated that the Bank received majority of deposits on the basis of Wakala contract;
the clients are informed of the expected profit rate and the Bank holds one general account for these deposits. It
is also explained that the Bank received limited amount of savings account deposits for investment on the basis
of Mudaraba which are comingled with the funds of shareholders in a common pool. The Board has advised
that the Bank expands its activities of receiving fixed-term deposits on Mudaraba basis in line with the practice
in other Islamic banks.

The Board believes that the consolidated financial statements, the income statement and the distribution of
profits between depositors and shareholders had been prepared on this basis.

Fourth: Zakah:
Since the Articles of Association of the Bank did not require the Bank to pay Zakah on behalf of the Shareholders,
the Board has calculated the Zakah due to shareholders which is to be communicated to the shareholders
accordingly.

The Board is hereby emphasizing that the responsibility to comply with the Rules and Principles of Shari’a
in all activities and transactions of the Bank fall on the Bank’s management. The Board confirms that the
executed transactions that are submitted by the management of the Bank for the Board’s review during the
year are generally in compliance with Principles and Rules of Shari’a. The management has shown interest and
willingness to execute the recommendation of the Board.

Dr. Hussein Hamed Hassan Dr. Ali Al Qura Daghi

Chairman Member

Dr. Mohammed Zoeir Shaikh Adnan Al Qattan

Member & Secretary to the Board Member

AL SALAM BANK-BAHRAIN 43
 P.O Box 140
14th Floor - The Tower
Bahrain Commercial Complex
Manama, Kingdom of Bahrain
Tel: +973 1753 5455 Fax: +973 1753 5405
Independent Auditors’ Report to the Shareholders of manama@[Link]
[Link]/me
Al Salam Bank-Bahrain B.S.C. C.R. No. 6700

We have audited the accompanying consolidated statement of financial position of Al Salam Bank-Bahrain B.S.C.
(“the Bank”) and its subsidiary (together “the Group”) as of 31 December 2009, and the related consolidated
statements of income, comprehensive income, cash flows and changes in equity for the year then ended. These
consolidated financial statements and the Group’s undertaking to operate in accordance with Islamic Shari’a Rules
and Principles are the responsibility of the Group’s Board of Directors. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit.

Board of Directors’ Responsibility for the Consolidated Financial Statements

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

Auditors’ Responsibility
We conducted our audit in accordance with both International Standards on Auditing and Auditing Standards for
Islamic Financial Institutions. Those Standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement.

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

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

Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects the consolidated financial
position of the Group as of 31 December 2009, the results of its operations, its cash flows and changes in equity for
the year then ended in accordance with the Financial Accounting Standards issued by the Accounting and Auditing
Organization for Islamic Financial Institutions and the Islamic Shari’a Rules and Principles as determined by the
Shari’a Supervisory Board of the Group.

Other Regulatory Matters

We confirm that, in our opinion, proper accounting records have been kept by the Bank and the consolidated
financial statements, and the contents of the Report of the Board of Directors relating to these consolidated financial
statements, are in agreement therewith. We further report, to the best of our knowledge and belief, that no violations
of the Bahrain Commercial Companies Law, nor of the Central Bank of Bahrain and Financial Institutions Law, nor of
the memorandum and articles of association of the Group, have occurred during the year ended 31 December 2009
that might have had a material adverse effect on the business of the Bank or on its consolidated financial position and
that the Bank has complied with the terms of its banking licence.

15 February 2010
Manama, Kingdom of Bahrain

44 AL SALAM BANK-BAHRAIN A member firm of Ernst & Young Global Limited

 Consolidated Statement of
Financial Position
31 December 2009

31 December 31 December
2009 2008
Note BD BD
ASSETS
Cash and balances with Central Bank of Bahrain 5 126,739,202 83,533,981
Central Bank of Bahrain Sukuk 32,907,875 31,095,000
Murabaha receivables from banks 6 149,303,782 87,167,449
Corporate Sukuk 16,949,546 -
Murabaha and Mudaraba receivables 7 87,273,825 72,483,745
Ijarah Muntahia Bittamleek 8 46,314,651 41,530,784
Musharaka financing 5,384,369 -
Assets under conversion 9 98,305,000 -
Non-trading investments 10 184,679,822 116,929,500
Investment in an associate 11 7,659,055 8,011,913
Investment property 1,177,528 1,177,528
Receivables and prepayments 12 26,902,192 21,032,829
Premises and equipment 2,337,436 2,583,796
Assets held-for-sale - 88,934,033
TOTAL ASSETS 785,934,283 554,480,558

LIABILITIES, UNRESTRICTED INVESTMENT

ACCOUNTS AND EQUITY

LIABILITIES
Murabaha and Wakala payables to banks 89,397,722 32,880,685
Wakala from non-banks 317,369,585 289,004,770
Customers’ current accounts 32,699,944 42,985,844
Liabilities under conversion 9 120,402,000 -
Other liabilities 13 14,877,262 10,755,559
TOTAL LIABILITIES 574,746,513 375,626,858
UNRESTRICTED INVESTMENT ACCOUNTS 14 9,409,467 6,370,219

The attached notes 1 to 30 form part of these consolidated financial statements.

AL SALAM BANK-BAHRAIN 45
 Consolidated Statement of
Financial Position (continued)
31 December 2009

31 December 31 December
2009 2008
Note BD BD

EQUITY
Share capital 15 142,577,508 120,000,000
Reserves and retained earnings 15 41,356,388 39,660,956
Proposed appropriations 15 14,257,750 12,822,525
Total equity attributable to shareholders of the Bank 198,191,646 172,483,481
Non-controlling interest 3,586,657 -
TOTAL EQUITY 201,778,303 172,483,481

TOTAL LIABILITIES, UNRESTRICTED

785,934,283 554,480,558
INVESTMENT ACCOUNTS AND EQUITY

These consolidated financial statements have been authorised for issue in accordance with a resolution of the
Board of Directors dated 15 February 2010.

Mohamed Ali Rashid Alabbar Yousif Taqi

Chairman Director & Chief Executive Officer

The attached notes 1 to 30 form part of these consolidated financial statements.

46 AL SALAM BANK-BAHRAIN
 Consolidated
Income Statement
Year ended 31 December 2009

31 December 31 December
2009 2008
BD BD
OPERATING INCOME
Income from financing contracts 16,710,523 14,087,135
Gains on disposal of investments 11,781,651 30,266,556
Gains on investments designated as
fair value through profit or loss 5,772,270 5,259,691
Other operating income (Note 16) 911,486 2,300,596

35,175,930 51,913,978
Less: Profit paid and payable on Murabaha and Wakala from banks (1,118,975) (2,489,667)
Less: Profit on Wakala from non-banks (13,928,052) (9,279,138)
Less: Profit on unrestricted investment accounts (155,520) (219,939)
Less: Depreciation on Ijarah Muntahia Bittamleek (Note 8) (4,037,647) (2,323,976)

TOTAL OPERATING INCOME 15,935,736 37,601,258

OPERATING EXPENSES
Staff costs 5,130,940 6,854,616
Premises and equipment cost 723,322 582,745
Depreciation 1,009,690 902,526
Other operating expenses 2,853,219 3,438,451

Total operating expenses 9,717,171 11,778,338

PROFIT BEFORE RESULTS OF SUBSIDIARY AND ASSOCIATE 6,218,565 25,822,920

Gain arising on acquisition of a subsidiary (Note 3) 7,996,039 -
Share of loss from an associate (Note 11) (254,224) (280,239)
Post acquisition profit from the subsidiary 21,000 -
Share of Shari’a prohibited income contributed to charity (18,965) -

NET PROFIT FOR THE YEAR 13,962,415 25,542,681

Attributable to:
Equity holders of the Bank 13,960,380 25,542,681
Non-controlling interest 2,035 -

13,962,415 25,542,681

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 1,300,825,581 1,200,000,000

BASIC AND DILUTED EARNINGS PER SHARE (FILS) 10.7 21.3

The attached notes 1 to 30 form part of these consolidated financial statements.

AL SALAM BANK-BAHRAIN 47
 Consolidated Statement of
Comprehensive Income
Year ended 31 December 2009

31 December 31 December
2009 2008
BD BD

NET PROFIT FOR THE YEAR 13,962,415 25,542,681

Other comprehensive income:

Net change in fair value (367,968) -
Exchange differences on
investment in an associate (98,634) 99,010

Other comprehensive income for the year (466,602) 99,010

TOTAL COMPREHENSIVE INCOME FOR THE YEAR 13,495,813 25,641,691

Attributable to:
Equity holders of the Bank 13,480,309 25,641,691
Non-controlling interest 15,504 -

13,495,813 25,641,691

The attached notes 1 to 30 form part of these consolidated financial statements.

48 AL SALAM BANK-BAHRAIN
 Consolidated Statement of
Cash Flows
Year ended 31 December 2009

31 December 31 December
2009 2008
BD BD

OPERATING ACTIVITIES
Net profit for the year 13,962,415 25,542,681
Adjustments:
Depreciation 1,009,690 902,526
Unrealised (gains) / losses on investments designated as fair value
(5,772,270) 2,050,309
through profit or loss
Share of loss from an associate 254,224 280,239

Operating income before changes in operating assets and liabilities 9,454,059 28,775,755

Changes in operating assets and liabilities:

Mandatory reserve with Central Bank of Bahrain (4,486,000) (7,241,000)
Central Bank of Bahrain Sukuk (1,812,875) (10,715,000)
Murabaha receivables from banks with
1,497,724 (1,240,065)
original maturities of 90 days or more
Corporate Sukuk (17,456,513) -
Murabaha and Mudaraba receivables (14,790,080) (39,842,146)
Ijarah Muntahia Bittamleek (4,783,867) (31,094,920)
Musharaka financing (5,384,369) -
Assets under conversion 9,030,000 -
Non-trading investments, net (1,208,099) (56,244,113)
Receivables and prepayments (12,472,402) (10,527,784)
Assets held-for-sale 28,164,080 (79,910,033)
Murabaha and wakala payables to banks 56,517,037 (64,102,356)
Wakala from non-banks 28,364,815 182,096,061
Customers’ current accounts (10,285,900) 37,297,159
Liabilities under conversion (6,262,000) -
Other liabilities (459,787) 1,250,688

Net cash from (used in) operating activities 53,625,823 (51,497,754)

The attached notes 1 to 30 form part of these consolidated financial statements.

AL SALAM BANK-BAHRAIN 49
 Consolidated Statement of
Cash Flows (continued)
Year ended 31 December 2009

31 December 31 December
2009 2008
BD BD

INVESTING ACTIVITIES
Cash flow arising on acquisition of a subsidiary 58,092,000 -
Purchase of premises and equipment (265,331) (507,070)

Net cash from (used in) investing activities 57,826,669 (507,070)

FINANCING ACTIVITIES
Unrestricted investment accounts 3,039,248 (13,399,366)
Share issue expenses (136,427) -
Dividends (12,000,000) (12,000,000)
Net movement in non-controlling interests (2,035) -

Net cash used in financing activities (9,099,214) (25,399,366)

NET CHANGE IN CASH AND CASH EQUIVALENTS 102,353,278 (77,404,190)

Cash and cash equivalents at 1 January 156,204,000 233,608,190

CASH AND CASH EQUIVALENTS AT 31 DECEMBER 258,557,278 156,204,000

Cash and cash equivalents comprise of:

Cash and other balances with Central Bank of Bahrain (Note 5) 104,616,277 67,263,285
Balances with other banks (Note 5) 4,755,925 3,389,696
Murabaha receivables from banks with
149,185,076 85,551,019
original maturities of less than 90 days

258,557,278 156,204,000

The attached notes 1 to 30 form part of these consolidated financial statements.

50 AL SALAM BANK-BAHRAIN
 Consolidated Statement of Changes In Equity
Year ended 31 December 2009
Attributable to equity holders of the Bank

Foreign
Changes exchange Share Non-
Share Statutory Retained Investment in fair translation premium Proposed controlling Total
capital reserve earnings reserve value reserve reserve appropriations Total interest equity
BD BD BD BD BD BD BD BD BD BD BD

Balance as of 1 January 2008 120,000,000 3,959,869 12,458,881 22,523,040 - - - 529,087 159,470,877 - 159,470,877

Total comprehensive income for the year - - 25,542,681 - - 99,010 - - 25,641,691 - 25,641,691
Zakah on 2008 earnings - - (822,525) - - - - 822,525 - - -
Charitable donations - - (100,000) - - - - - (100,000) - (100,000)
Transfer from investment reserve - - 2,050,309 (2,050,309) - - - - - - -
Transfer to statutory reserve - 2,554,268 (2,554,268) - - - - - - - -
Zakah paid - - - - - - - (529,087) (529,087) - (529,087)
Zakah contribution - - - - - - - - - - -
Dividends paid for 2007 - - (12,000,000) - - - - - (12,000,000) - (12,000,000)
Proposed dividends for 2008 - - (12,000,000) - - - - 12,000,000 - - -

- 2,554,268 116,197 (2,050,309) - 99,010 - 12,293,438 13,012,604 - 13,012,604

Balance at 31 December 2008 120,000,000 6,514,137 12,575,078 20,472,731 - 99,010 - 12,822,525 172,483,481 - 172,483,481

Non-controlling interest arising on

acquisition of a subsidiary (Note 3) - - - - - - - - - 3,571,153 3,571,153
Total comprehensive income for the year
Net profit for the year - - 13,960,380 - - - - - 13,960,380 2,035 13,962,415
Other Comprehensive income:
Changes on investment in an associate - - - - - (98,634) - - (98,634) - (98,634)
Net change in fair value - - - - (381,437) - - - (381,437) 13,469 (367,968)

Total comprehensive income - 2009 - - 13,960,380 - (381,437) (98,634) - - 13,480,309 15,504 13,495,813
120,000,000 6,514,137 26,535,458 20,472,731 (381,437) 376 - 12,822,525 185,963,790 15,504 185,979,294
Transfer to investment reserve - - (5,772,270) 5,772,270 - - - - - - -
Transfer to statutory reserve - 1,396,038 (1,396,038) - - - - - - - -
Zakah paid - - - - - - - (822,525) (822,525) - (822,525)
Charitable donations - - (100,000) - - - - - (100,000) - (100,000)
Dividends paid for 2008 - - - - - - - (12,000,000) (12,000,000) - (12,000,000)
Proposed dividends for 2009 (Note 15.4) - - (14,257,750) - - - - 14,257,750 - - -
Shares issued (Notes 3 and 15.1) 22,577,508 - - - - - 2,709,300 - 25,286,808 - 25,286,808
Share issue expenses - - - - - - (136,427) - (136,427) - (136,427)

AL SALAM BANK-BAHRAIN
Balance at 31 December 2009 142,577,508 7,910,175 5,009,400 26,245,001 (381,437) 376 2,572,873 14,257,750 198,191,646 3,586,657 201,778,303

The attached notes 1 to 30 form part of these consolidated financial statements.

51
 Notes to the Consolidated
Financial Statements
31 December 2009

1 INCORPORATION AND PRINCIPAL ACTIVITIES

The parent company, Al Salam Bank-Bahrain B.S.C. (“the Bank”) was incorporated in the Kingdom of Bahrain
under the Bahrain Commercial Companies Law No. 21/2001 and was registered with Ministry of Industry
and Commerce under Commercial Registration Number 59308 on 19 January 2006. The Bank is regulated
and supervised by the Central Bank of Bahrain (“the CBB”) and has an Islamic retail banking license and is
operating under Islamic principles, and in accordance with all the relevant regulatory guidelines for Islamic
banks issued by the CBB. The Bank’s registered office is P.O. Box 18282, Building 22, Avenue 58, Block 436,
Al Seef District, Kingdom of Bahrain.

During the year, the Bank acquired a 90.31% stake in Bahraini Saudi Bank B.S.C. (BSB), a publicly listed
commercial bank in the Kingdom of Bahrain. BSB operates under a retail banking license issued by the Central
Bank of Bahrain. BSB has applied for an Islamic retail banking license with the CBB and is awaiting approval.
Subsequent to acquisition by the Bank, BSB has discontinued new conventional activities and the conversion
into a fully compliant Islamic operations is in progress.

The Bank and its subsidiary BSB (together known as “the Group”) operate through eight retail branches in
the Kingdom of Bahrain. The Bank offers a full range of Shari’a-compliant banking services and products.
The activities of the Bank include accepting money market placements, managing profit sharing investment
accounts, offering Islamic financing contracts, dealing in Shari’a-compliant financial instruments as principal/
agent, managing Shari’a-compliant financial instruments and other activities permitted for under the CBB’s
Regulated Banking Services as defined in the licensing framework.

2 ACCOUNTING POLICIES

2.1 BASIS OF PREPARATION

The consolidated financial statements are prepared on a historical cost basis, except for investments held at fair
value through profit or loss, available-for-sale investments and investment properties. These consolidated financial
statements incorporate all assets, liabilities and off balance sheet financial instruments held by the Group.
Investment in Al Salam Bank-Algeria is equity accounted as per IAS 28, Investment in Associates (Note 11).

These consolidated financial statements are presented in Bahraini dinars, being the functional and presentation
currency of the Group.

Statement of compliance
The consolidated financial statements of the Group are prepared in accordance with the Financial Accounting
Standards (FAS) issued by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI)
and in conformity with the Bahrain Commercial Companies Law and the Central Bank of Bahrain and Financial
Institutions Law. In accordance with AAOIFI, for matters for which no AAOIFI standards exist, the Group uses
the relevant International Financial Reporting Standard.

52 AL SALAM BANK-BAHRAIN
2 ACCOUNTING POLICIES (continued)

2.1 BASIS OF PREPARATION (continued)

The Group presents its consolidated statement of financial position broadly in order of liquidity. An analysis
regarding recovery or settlement within 12 months after the consolidated statement of financial position date
(current) and more than 12 months after the consolidated statement of financial position date (non-current) is
presented in Note 22.

Basis of consolidation
The consolidated financial statements comprise the financial statements of the Bank and its subsidiary for the
year ended 31 December 2009. The financial statements of the Bank’s subsidiary is prepared for the same
reporting year as the Bank, using consistent accounting policies. Non Shari’a compliant assets and liabilities of
the subsidiary are consolidated as set out in Note 9.

Subsidiaries are fully consolidated from the date on which control is transferred to the Bank. Control is achieved
where the Bank has the power to govern the financial and operating policies of an entity so as to obtain benefits
from its activities. The results of subsidiaries acquired during the year are included in the consolidated income
statement from the date of gaining control over the subsidiary.

Non-controlling interests represent the portion of profit or loss and net assets not owned, directly or indirectly,
by the Group and are presented separately in the consolidated income statement and within equity in the
consolidated statement of financial position, separately from parent shareholders’ equity.

2.2 SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES

The preparation of the consolidated financial statements requires management to make judgements and
estimates that affect the reported amount of financial assets and liabilities and disclosure of contingent liabilities.
These judgements and estimates also affect the revenues and expenses and the resultant provisions as well as
fair value changes reported in equity.

Judgements are made in the classification of fair value through profit or loss, assets held for sale or held-to-
maturity investments based on management’s intention at acquisition of the financial asset. As fully described
below, judgements are also made in determination of the objective evidence that a financial asset is impaired.

Classification of investments
Management decides upon acquisition of an investment whether it should be classified as fair value through
profit or loss, available for sale or held-to-maturity.

Impairment of available-for-sale equity investments

The Group treats available-for-sale equity investments as impaired when there has been a significant or
prolonged decline in the fair value below its cost or where other objective evidence of impairment exists. In
addition, the Group evaluates other factors, including normal volatility in share price for quoted equities and
the future cash flows and the discount factors for unquoted equities.

Estimation uncertainty
The key assumptions concerning the future and other key sources of estimating uncertainty at the date of the
statement of financial position, that have a significant risk of causing a material adjustment to the carrying
amounts of assets and liabilities within the next financial year are discussed below:

AL SALAM BANK-BAHRAIN 53
 Notes to the Consolidated
Financial Statements (continued)
31 December 2009

2 ACCOUNTING POLICIES (continued)

2.2 SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES (continued)

Impairment losses on financial contracts

The Group reviews its financial contracts on a regular basis to assess whether a provision for impairment should
be recorded in the consolidated statement of income. In particular, considerable judgement by management
is required in the estimation of the amount and timing of future cash flows when determining the level of
provisions required. Such estimates are necessarily based on assumptions about several factors involving
varying degrees of judgment and uncertainty, and actual results may differ resulting in future changes to such
provisions.

Collective impairment provisions on financial contracts

In addition to specific provisions against individually significant financial contracts, the Group also considers
the need for a collective impairment provision against financial contracts which although not specifically
identified as requiring a specific provision, have a greater risk of default than when originally granted. This
collective provision is based on any deterioration in the status, as determined by the Group, of the financial
contracts since they were granted (acquired). The amount of the provision is based on the historical loss pattern
for other contracts within each grade and is adjusted to reflect current economic changes.

Valuation of unquoted private equity and real estate investments

Valuation of above investments is normally based on one of the following:

• valuation by independent external valuers;

• recent arm’s length market transactions;
• current fair value of another instrument that is substantially the same;
• present value of expected cash flows discounted at current rates applicable for items with similar terms and
risk characteristics; or
• other valuation models.

The Group calibrates the valuation techniques periodically and tests these for validity using either prices from
observable current market transactions in the same instrument or other available observable market data.

2.3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The principal accounting policies applied in the preparation of these consolidated financial statements are set
out below:

a) Financial contracts
Financial contracts consist of cash and balances with banks and the Central Bank of Bahrain, Murabaha
receivables (net of deferred profit), Mudaraba, Musharaka and Ijarah Muntahia Bittamleek. Balances relating to
these contracts are stated net of provisions for impairment.

54 AL SALAM BANK-BAHRAIN
2 ACCOUNTING POLICIES (continued)

2.3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

b) Corporate sukuk
These are quoted securities and classified as available-for-sale. These are recorded at the amortised cost and
remeasured at fair value. Changes in fair value are recognized in the other comprehensive income until the
investment is derecognised or the investment is determined to be impaired, upon which the cumulative fair
value is transferred to consolidated income statement.

c) Murabaha and Mudaraba receivables

Murabaha and Mudaraba receivables are stated net of provision for impairment and deferred profits.

d) Ijarah Muntahia Bittamleek

Ijarah Muntahia Bittamleek assets comprises assets under lease, comprising aircraft, land and buildings, under
terms that would transfer ownership of the assets to third parties at the end of the respective lease term.

Depreciation is provided on a straight-line basis on all Ijarah Muntahia Bittamleek assets other than land
(which is deemed to have an indefinite life), at rates calculated to write off the cost of each asset over the short
of either period of the lease or economic life of the asset.

e) Musharaka
These are initially stated at the fair value of the consideration given and subsequently remeasured at amortised
cost less provision for impairment in value, if any.

f) Assets and liabilities under conversion

These represent assets and liabilities of BSB which are under conversion to Shari’a compliant products. These
are initially measured at fair value at the date of acquisition and the subsequent measurement is as follows:

Assets under conversion:

Due from Banks and Loans and advances to customers:
At amortised cost less any amounts written off and provision for impairment.

Investments:
These are classified as available-for-sale investments and are fair valued based on criteria set out in Note 2.3
g. Any changes in fair values subsequent to acquisition date are recognized in other comprehensive income.

Liabilities under conversion:

These are remeasured at amortised cost.

g) Non-trading investments
These are classified as held-to-maturity, available-for-sale or fair value through profit or loss.

All investments are initially recognised at cost, being the fair value of the consideration given including
acquisition costs associated with the investment. Acquisition cost relating to investments designated as fair
value through profit and loss is charged to consolidated income statement.

Following the initial recognition of investments, the subsequent period-end reporting values are determined as
follows:

AL SALAM BANK-BAHRAIN 55
 Notes to the Consolidated
Financial Statements (continued)
31 December 2009

2 ACCOUNTING POLICIES (continued)

2.3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Investments held-to-maturity
Investments which have fixed or determinable payments and fixed maturity which are intended to be held-to-
maturity, are carried at amortised cost, less provision for impairment in value.

Investments available-for-sale
After initial recognition, investments which are classified “available-for-sale” are normally remeasured at
fair value, unless the fair value cannot be reliably determined, in which case they are measured at cost less
impairment. Fair value changes are reported in the other comprehensive income until the investment is
derecognised or the investment is determined to be impaired. On derecognition or impairment the cumulative
gain or loss previously reported as “cumulative changes in fair value” within equity, is included in the
consolidated income statement.

Investments carried at fair value through profit or loss

Investments in this category are designated as such on initial recognition if these investments are evaluated on
a fair value basis in accordance with the Group’s risk management policy and its investment strategy. These
include all private equity investments including those in joint ventures and associates.

Investments at fair value through profit or loss are recorded in the balance sheet at fair value. Changes in fair
value are recorded as “Gains on investments designated at fair value through profit or loss” in the consolidated
income statement.

h) Investment reserve
Unrealised gains and losses resulting from revaluation of “investments carried at fair value through profit or
loss” and “investment properties” recorded in the consolidated statement of income are appropriated to an
investment reserve in equity and are not available for distribution to the shareholders. Upon disposal of such
assets, the related cumulative gains or losses are transferred to retained earnings and become available for
distribution.

i) Investment in an associate
The Group’s investments in its associates, that are acquired for strategic purposes, are accounted for under the
equity method of accounting. Other equity investments in associates are accounted for as fair value through
profit or loss by availing the scope exemption under IAS 28, Investments in associates. An associate is an
entity over which the Group has significant influence and which is neither a subsidiary nor a joint venture. An
entity is considered as an associate if the Group has more than 20% ownership of the entity or the Group has
significant influence through any other mode.

56 AL SALAM BANK-BAHRAIN
2 ACCOUNTING POLICIES (continued)

2.3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

i) Investment in an associate (continued)

Under the equity method, the investment in the associate is carried in the balance sheet at cost plus post-
acquisition changes in the Group’s share of net assets of the associate. Losses in excess of the cost of the
investment in an associate are recognised when the Group has incurred obligations on its behalf. Goodwill
relating to an associate is included in the carrying amount of the investment and is not amortised. The
consolidated income statement reflects the Group’s share of results of operations of the associate. Where there
has been a change recognised directly in the equity of the associate, the Group recognises its share of any
changes and discloses this, when applicable, in the consolidated statement of changes in equity.

The reporting dates of the associate and the Group are identical and the associates accounting policy conform
to those used by the Group for like transactions and events in similar transactions.

After application of the equity method, the Group determines whether it is necessary to recognise an additional
impairment loss on its investment in associates. The Group determines at each balance sheet date whether there
is any objective evidence that the investment in associates are impaired. If this is the case, the Group calculates
the amount of impairment as the difference between the recoverable amount of the associate and its carrying
value and recognises the amount in the consolidated income statement.

Profit and losses resulting from transactions between the Group and the associates are eliminated to the extent
of the interest in associates.

Foreign exchange translation gains/losses arising out of the above investment in the associate are included in the
other comprehensive income.

j) Investment properties
Investment properties are those held to earn rentals and/or for capital appreciation. These are initially recorded
at cost, including acquisition charges associated with the property.

Subsequent to initial recognition, all investment properties are remeasured at fair value and changes in fair value
are recognised in the consolidated statement of income as gain or loss in investment properties. The fair value
of the investment properties is determined either based on valuations made by independent valuers or using
internal models with consistent assumptions.

k) Premises and equipment

Premises and equipment are stated at cost less accumulated depreciation and any impairment in value.
Depreciation is provided on a straight-line basis over the estimated useful lives of all premises and equipment,
other than freehold land and capital work-in-progress.

- Computer hardware and software 3 to 5 years

- Furniture and office equipment 3 to 5 years
- Motor vehicle 5 years
- Leasehold Improvements Over the lease period

AL SALAM BANK-BAHRAIN 57
 Notes to the Consolidated
Financial Statements (continued)
31 December 2009

2 ACCOUNTING POLICIES (continued)

2.3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

l) Subsidiaries acquired with a view to sell

A subsidiary acquired with a view to subsequent disposal within 12 months are classified as “held-for-sale”
when the sale is highly probable. Related assets and liabilities of the subsidiary are shown separately on the
balance sheet as “Assets held-for-sale” and “Liabilities relating to assets held-for-sale”. Assets that are classified
as held-for-sale are measured at the lower of carrying amount and fair value less costs to sell. Any resulting
impairment loss reduces the carrying amount of the assets. Assets that are classified as held-for-sale are not
depreciated.

Any impairment loss is recognised in the consolidated income statement for any initial and subsequent write
down of these assets to fair value, less costs to sell. A gain for any subsequent increase in the fair value, less costs
to sell, is recognised to the extent that it is not in excess of the cumulative impairment loss that was recognised.

m) Business Combinations and goodwill

Business combinations are accounted for using the purchase method of accounting. This involves recognising
identifiable assets (including previously unrecognised intangible assets) and liabilities (including contingent
liabilities and excluding future restructuring) of the acquired business at fair value. Any excess of the cost of
acquisition over the fair values of the identifiable net assets acquired is recognised as goodwill. If the cost of
acquisition is less than the fair values of the identifiable net assets acquired, the discount on acquisition is
recognised directly in the consolidated income statement in the year of acquisition.

Goodwill acquired in a business combination is initially measured at cost, being the excess of the cost of
the business combination over the Bank’s interest in the net fair value of the identifiable assets, liabilities and
contingent liabilities acquired. Gain on business combination, being the excess of the Bank’s interest in the
net fair value of the identifiable assets, liabilities and contingent liabilities acquired over the cost of business
acquisition is recognised as gain in the consolidated statement of income.

Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill
is reviewed for impairment annually, or more frequently, if events or changes in circumstances indicate that the
carrying value may be impaired.

n) Impairment and uncollectability of financial assets

An assessment is made at each statement of financial position date to determine whether there is objective
evidence that a specific financial asset may be impaired. If such evidence exists, any impairment loss, is
recognised in the consolidated income statement.

58 AL SALAM BANK-BAHRAIN
2 ACCOUNTING POLICIES (continued)

2.3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

n) Impairment and uncollectability of financial assets (continued)

Impairment is determined as follows:

(i) for assets carried at amortised cost, impairment is based on estimated cash flows based on the original
effective profit rate;
(ii) for assets carried at fair value, impairment is the difference between cost and fair value; and
(iii) for assets carried at cost, impairment is based on present value of anticipated cash flows based on the
current market rate of return for a similar financial asset.

For available-for-sale equity investments reversal of impairment losses are recorded as increases in cumulative
changes in fair value through equity.

In addition, a collective provision is made to cover impairment for specific assets where there is a measurable
decrease in estimated future cash flows.

o) Offsetting
Financial assets and financial liabilities can only be offset with the net amount being reported in the consolidated
statement of financial position when there is a legally enforceable right to set off the recognised amounts
and the Group intends to either settle on a net basis, or intends to realise the asset and settle the liability
simultaneously.

p) Provisions
Provisions are recognised when the Group has a present obligation (legal or constructive) arising from a past
event and the costs to settle the obligation are both probable and able to be reliably measured.

q) Employees’ end of service benefits

The Group provides end of service benefits to its expatriate employees. Entitlement to these benefits is based
upon the employees’ final salary and length of service, subject to completion of a minimum service period. The
expected costs of these benefits are accrued over the period of employment.

For Bahraini employees, the Group makes contributions to Social Insurance Organisation calculated as a
percentage of the employees’ salaries. The Group’s obligations are limited to these contributions, which are
expensed when due.

r) Revenue recognition

Murabaha
As the income is quantifiable and contractually determined at the commencement of the contract, income
is recognised on a straight-line basis. Recognition of income is suspended when the Group believes that the
recovery of these amounts may be doubtful or normally when the payments of Murabaha installments are
overdue by 90 days, whichever is earlier.

Corporate sukuk
Income on Corporate sukuk is recognized on a time-proportionate basis based on underlying profit rate of the
sukuk. Accrual of income is suspended when the Group believes that the recovery of these amounts may be
doubtful or normally when the repayments are overdue by 90 days, whichever is earlier.

AL SALAM BANK-BAHRAIN 59
 Notes to the Consolidated
Financial Statements (continued)
31 December 2009

2 ACCOUNTING POLICIES (continued)

2.3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

r) Revenue recognition (continued)

Mudaraba
Income on Mudaraba transactions are recognised when the right to receive is established or these are declared
by the Mudarib, whichever is earlier.

Dividends
Dividend income is recognised when the Group’s right to receive the payment is established.

Ijarah Muntahia Bittamleek

Ijarah Muntahia Bittamleek income is recognised on a time-proportionate basis over the lease term. Income
related to non-performing Ijarah Muntahia Bittamleek is suspended. Accrual of income is suspended when the
Group believes that the recovery of these amounts may be doubtful or normally when the rental payments are
overdue by 90 days, whichever is earlier.

Musharaka
Income on Musharaka is recognized when the right to receive payment is established or on distributions.

Fees and commission income

The Group earns fee and commission income from a diverse range of services it provides to its customers. Fee
income can be divided into the following main categories:

Fee income on financing transactions: Fee earned on financing transactions including up-front fees and early
settlement fees are recognised when earned. To the extent the fees are deemed yield enhancement they are
recognised over the period of the financing contracts.

Fee income from transaction services: Fee arising from corporate finance, corporate advisory, arranging the sale
of assets and wealth management are recognised when earned or on a time proportionate basis when the fee
is linked to time.

Fair value of financial assets

For investments that are traded in organised financial markets, fair value is determined by reference to the
prevailing market bid price on the balance sheet date.

For investments where there is no quoted market price, a reasonable estimate of fair value is determined by
reference to valuation by independent external valuers or based on recent arm’s length market transactions.

60 AL SALAM BANK-BAHRAIN
2 ACCOUNTING POLICIES (continued)

2.3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

r) Revenue recognition (continued)

Alternatively, the estimate would also be based on current market value of another instrument, which is
substantially the same, or is based on the assessment of future cash flows. The cash equivalent values are
determined by the Group at current profit rates for contracts with similar terms and risk characteristics.

For investments having fixed or determinable payments, fair value is based on the net present value of estimated
future cash flows determined by the Group using current profit rates for investments with similar terms and risk
characteristics.

s) Foreign currencies
Foreign currency transactions are recorded at rates of exchange prevailing at the dates of the transactions.
Monetary assets and liabilities in foreign currencies at the statement of financial position date are retranslated
at market rates of exchange prevailing at that date. Gains and losses arising on translation are recognised in the
consolidated income statement. Non-monetary assets that are measured in terms of historical cost in foreign
currencies are recorded at rates of exchange prevailing at the value dates of the transactions. Translation gains
or losses on non-monetary items classified as “available-for-sale” and investment in associates are included in
consolidated statement of changes in equity until the related assets are sold or derecognised at which time they
are recognised in the consolidated income statement. Translation gains on non-monetary assets classified as
“fair value through profit or loss” are directly recognised in the consolidated income statement.

t) Trade and settlement date accounting

Purchases and sales of financial assets are recognised on the trade date, i.e. the date that the Group purchases
or sells the asset.

u) Derecognition of financial assets

A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets)
is derecognised where:

(i) the rights to receive cash flows from the asset have expired; or
(ii) the Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay
the received cash flows in full without material delay to a third party under a ‘pass-through’ arrangement; and
(iii) either (a) the Group has transferred substantially all the risks and rewards of the asset, or (b) the Group has
neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred the
control of the asset.

When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass-through
arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor
transferred control of the asset, the asset is recognised to the extent of the Group’s continuing involvement in
the asset. In that case, the Group also recognises an associated liability. The transferred asset and the associated
liability are measured on a basis that reflects the rights and obligations that the Group has retained.

Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower
of the original carrying amount of the asset and the maximum amount of consideration that the Group could
be required to repay.

AL SALAM BANK-BAHRAIN 61
 Notes to the Consolidated
Financial Statements (continued)
31 December 2009

2 ACCOUNTING POLICIES (continued)

2.3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

v) Derecognition of financial liabilities

A financial liability is derecognised when the obligation under the liability is discharged or cancelled or
expires. Where an existing financial liability is replaced by another from the same source on substantially
different terms, or the terms of an existing liability are substantially modified, such an exchange or modification
is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in
the respective carrying amounts is recognised in the consolidated statement of income.

w) Fiduciary assets
Assets held in a fiduciary capacity are not treated as assets of the Group and are accordingly not shown in the
consolidated statement of financial position.

x) Dividends on ordinary shares

Dividends on ordinary shares are recognised as a liability and deducted from equity when they are approved
by the Bank’s shareholders. Dividends for the year that are approved after the balance sheet date are included
in the equity and are disclosed as an event after the balance sheet date.

y) Unrestricted investment account holders (URIA)

All unrestricted investment accounts are carried at capital received plus profit earned less amounts paid.
Income to unrestricted investment account holders is allocated, net of Mudarib fees, on the basis of their
average daily balances in proportion to shareholders’ daily average balances.

z) Zakah
In accordance with the revised Articles of Association of the Bank, the responsibility to pay Zakah is on the
shareholders of the Bank.

aa) Cash and cash equivalents

Cash and cash equivalents comprise cash and balances with Central Bank of Bahrain and Murabaha receivables
from banks with maturities of less than 90 days from the date of acquisition.

62 AL SALAM BANK-BAHRAIN
3 BUSINESS COMBINATION

During the year, the Bank made an offer to acquire up to 100% of the issued and paid up shares of Bahraini
Saudi Bank B.S.C. (BSB), a publicly listed commercial bank incorporated in the Kingdom of Bahrain, at an
exchange ratio of one new share of the Bank for every two shares of BSB. The proposed acquisition through
share exchange was approved by the shareholders of the Bank in their Extraordinary General Assembly Meeting
held on 4 May 2009. The Bank acquired 90.31% stake in BSB and issued 225,775,075 ASBB new shares (Note
15.1). On 28 October 2009, the Board of BSB was reconstituted with three out of the five Board members of
BSB representing ASBB gaining effective control over BSB.

The fair value of the identifiable assets and liabilities of BSB as of 28 October 2009 and the gain arising out of
the acquisition are as follows:

Fair value Carrying value

BD BD
ASSETS ACQUIRED
Cash and balances at the Central Bank of Bahrain 58,092,000 58,092,000
Due from banks and financial institutions 5,680,000 5,680,000
Loans and advances to customers 72,281,000 79,857,000
Non-trading investments 28,870,000 30,310,000
Other assets 1,737,000 1,737,000
Premises and equipment 498,000 1,170,000
167,158,000 176,846,000

LESS: LIABILITIES ASSUMED

Due to banks and financial institutions (22,452,000) (22,452,000)
Customers’ deposits (103,811,000) (103,811,000)
Other liabilities (4,041,000) (4,041,000)
(130,304,000) (130,304,000)
FAIR VALUE OF NET ASSETS 36,854,000 46,542,000

GAIN ARISING ON ACQUISITION

Fair value of identifiable net assets acquired 36,854,000
Fair value of the consideration given (Note 15.1) (25,286,808)
Fair value of non-controlling interest in BSB (3,571,153)

NEGATIVE GOODWILL 7,996,039

The net cash inflow arising on acquisition amounted to BD 58,092,000. Other items including the issue of shares
have been treated as non-cash item for the purpose of consolidated statement of cash flows.

From the date of acquisition, BSB has contributed BD 18,965 to the net profit of the Bank. If the combination had
taken place at the beginning of the year, the Bank’s share of net loss for the year would have been BD 3,661,167.

AL SALAM BANK-BAHRAIN 63
 Notes to the Consolidated
Financial Statements (continued)
31 December 2009

4 CLASSIFICATION OF FINANCIAL INSTRUMENTS BY MEASUREMENT BASIS

As at 31 December 2009, financial instruments have been classified for the purpose of measurement under
International Accounting Standard 39: Financial Instruments: Recognition and Measurement as follows:

Financial
assets at fair Financial
value through Available for assets at cost /
profit or loss sale amortised cost Total
BD BD BD BD
ASSETS
Cash and balances with
- - 126,739,202 126,739,202
Central Bank of Bahrain
Central Bank of Bahrain Sukuk - - 32,907,875 32,907,875
Murabaha receivables from banks - - 149,303,782 149,303,782
Corporate Sukuk - 16,949,546 - 16,949,546
Murabaha and Mudaraba receivables - - 87,273,825 87,273,825
Ijarah Muntahia Bittamleek - - 46,314,651 46,314,651
Musharaka financing - - 5,384,369 5,384,369
Assets under conversion - 27,696,000 70,609,000 98,305,000
Non-trading investments 184,679,822 - - 184,679,822
Receivables - - 26,213,797 26,213,797

184,679,822 44,645,546 544,746,501 774,071,869

Financial
liabilities at fair Financial
value through Available for liabilities at
profit or loss sale amortised cost Total
BD BD BD BD
LIABILITIES AND UNRESTRICTED
INVESTMENT ACCOUNTS
Murabaha and Wakala payables to banks - - 89,397,722 89,397,722
Wakala from non-banks - - 317,369,585 317,369,585
Customers’ current accounts - - 32,699,944 32,699,944
Liabilities under conversion - - 120,402,000 120,402,000
Other liabilities - - 9,824,244 9,824,244
UNRESTRICTED INVESTMENT
- - 9,409,467 9,409,467
ACCOUNTS

- - 579,102,962 579,102,962

64 AL SALAM BANK-BAHRAIN
4 CLASSIFICATION OF FINANCIAL INSTRUMENTS BY MEASUREMENT BASIS
(continued)

As at 31 December 2008, financial instruments were classified as follows:

Financial
assets at fair Financial
value through Available for assets at cost /
profit or loss sale amortised cost Total
BD BD BD BD
ASSETS
Cash and balances with
Central Bank of Bahrain - - 83,533,981 83,533,981
Central Bank of Bahrain Sukuk - - 31,095,000 31,095,000
Murabaha receivables from banks - - 87,167,449 87,167,449
Murabaha and Mudaraba receivables - - 72,483,745 72,483,745
Ijarah Muntahia Bittamleek - - 41,530,784 41,530,784
Non-trading investments 116,929,500 - - 116,929,500
Receivables - - 20,439,688 20,439,688
Assets held-for-sale - - 88,934,033 88,934,033

116,929,500 - 425,184,680 542,114,180

LIABILITIES AND UNRESTRICTED

INVESTMENT ACCOUNTS
Murabaha and Wakala payables to banks - - 32,880,685 32,880,685
Wakala from non-banks - - 289,004,770 289,004,770
Customers’ current accounts - - 42,985,844 42,985,844
Other liabilities - - 2,614,170 2,614,170

UNRESTRICTED INVESTMENT
ACCOUNTS - - 6,370,219 6,370,219

- - 373,855,688 373,855,688

5 CASH AND BALANCES WITH CENTRAL BANK OF BAHRAIN

2009 2008
BD BD

Mandatory reserve with Central Bank of Bahrain 17,367,000 12,881,000

Cash and other balances with Central Bank of Bahrain 104,616,277 67,263,285
Balances with other banks 4,755,925 3,389,696

126,739,202 83,533,981

AL SALAM BANK-BAHRAIN 65
 Notes to the Consolidated
Financial Statements (continued)
31 December 2009

6 MURABAHA AND MUDARABA RECEIVABLES FROM BANKS

Up to Up to
3 months 3 months
2009 2008
BD BD

GCC 149,303,782 82,376,388

Europe - 4,791,061

149,303,782 87,167,449

Deferred profits on Murabaha receivables from banks amounted to BD 57,697 (2008: BD 31,685).

7 MURABAHA AND MUDARABA RECEIVABLES

Murabaha and Mudaraba receivables are shown net of deferred profits of BD9,664,651 (2008: BD8,026,806).

8 IJARAH MUNTAHIA BITTAMLEEK

This represents net investments in assets leased for periods which either approximate or cover major parts of
the estimated useful lives of such assets. The lease agreements stipulate that the lessor undertakes to transfer
the leased assets to the lessee at the end of the lease term upon the lesee fulfilling all obligations under the
lease agreement.

2009 2008
BD BD
Movements in Ijarah Muntahia Bittamleek assets are as follows:

At 1 January 41,530,784 10,435,863

Additions during the year 8,821,514 33,418,897
Ijarah assets depreciation - net (4,037,647) (2,323,976)

At 31 December 46,314,651 41,530,784

66 AL SALAM BANK-BAHRAIN
8 IJARAH MUNTAHIA BITTAMLEEK (continued)

2009 2008
BD BD
The future minimum lease receivable in aggregate are as follows:

Due within one year 17,183,480 9,915,774

Due in one to five years 22,179,292 26,505,879
Due after five years 6,951,879 5,109,131

46,314,651 41,530,784

2009 2008
BD BD
Ijarah Muntahia Bittamleek are divided into the following asset classes:
Aviation 3,595,657 3,836,702
Buildings 42,718,994 37,694,082

46,314,651 41,530,784

The accumulated depreciation on assets subject to Ijarah amounted to BD 4,862,954 (31 December 2008: BD
3,464,322).

9 ASSETS AND LIABILITIES UNDER CONVERSION

These represent interest bearing non-Shari’a compliant assets and liabilities of BSB, a majority owned subsidiary
of the Bank. At the balance sheet date, the conversion of the subsidiary into a fully compliant Islamic operations
had just begun, accordingly these assets and liabilities have been reported as separate line items on the face
of the consolidated statement of financial position. The details of these assets and liabilities under conversion
are as follows:

BD
Assets
Due from banks and financial institutions 6,839,000
Loans and advances to customers 63,770,000
Non trading investments 27,696,000

98,305,000

Liabilities
Due to banks and financial institutions 20,912,000
Customers’ deposits 99,490,000

120,402,000

BSB has pledged certain investments with a financial institution having a carrying value of BD 22.5 million
(2008: BD 25.8 million) as at 31 December 2009 against which there is no borrowing as at 31 December 2009
(2008: BD 9.4 million)

AL SALAM BANK-BAHRAIN 67
 Notes to the Consolidated
Financial Statements (continued)
31 December 2009

10 NON-TRADING INVESTMENTS

2009 2008
BD BD

Quoted 4,341,940 4,045,637

Unquoted based on valuation techniques:
- Market observable input 137,201,435 97,509,445
- Non-market observable input 43,136,447 15,374,418

184,679,822 116,929,500

These represent investments designated as fair value through profit or loss and are carried at fair value.

Certain of these investments are recorded at fair value using valuation techniques as current market transactions
or observable market data are not available. Their fair value is determined using a valuation model that has
been tested against the prices of actual market transactions and using the Group’s best estimate of the most
appropriate model inputs.

11 INVESTMENT IN AN ASSOCIATE

The Group has investment in an associate, Al Salam Bank Algeria (ASBA), a bank incorporated in Algeria.
Al Salam Bank Algeria is not listed on any stock exchange. The following table illustrates the summarised
financial information of the Group’s investment in ASBA:

2009 2008
BD BD
Associate’s balance sheet:
Total assets 69,691,689 39,514,495
Total liabilities 20,318,137 3,224,932

Net assets 49,373,552 36,289,563

Total revenue 1,076,952 9,090

Total expenses 2,842,396 1,410,287

Net loss for the year (1,765,444) (1,401,197)

Group’s share of associate’s loss: (254,224) (280,239)

68 AL SALAM BANK-BAHRAIN
12 RECEIVABLES AND PREPAYMENTS
2009 2008
BD BD

Profit receivable on Murabaha and Mudaraba 1,250,769 611,123

Rental receivable on Ijarah assets 1,313,819 278,838
Profit receivable on Sukuk 263,221 323,905
Prepayments 688,395 593,141
Other receivables 23,385,988 19,225,822

26,902,192 21,032,829

Other receivables include BD 17,892,079 relating to sale of investments. At 31 December 2008, the other
receivables included BD 8,515,761 relating to sale of investments and majority of which was received during
2009.

13 OTHER LIABILITIES

2009 2008
BD BD

Profit payable 3,198,408 2,614,170

Accounts payable and accruals 7,274,517 6,520,286
Dividends payable 3,805,362 1,504,598
End of service benefits 598,975 116,505

14,877,262 10,755,559

14 UNRESTRICTED INVESTMENT ACCOUNTS

Unrestricted investment account holders’ funds are commingled with the Bank’s funds and used to fund / invest
in Islamic financing contracts. According to the terms of acceptance of the unrestricted investment accounts,
100% of the funds are invested after deducting a mandatory reserve taking into consideration the relevant
weightage, if any. Unrestricted investment accounts have no restriction on cash withdrawal. The Mudarib fee
ranges between 40% and 50%.

The Mudarib’s share of profit during the year amounted to BD 152,010 (2008: BD 214,970). The average profit
rate for the URIA holders is about 1.25% (2008: 2.5%)

During the current year, an amount of BD 39,754,541 which was included in unrestricted investment reserve
as of 31 December 2008, has been reclassified to customers’ current account to conform with current year
presentation. This has not impacted the previously reported net income and total equity.

AL SALAM BANK-BAHRAIN 69
 Notes to the Consolidated
Financial Statements (continued)
31 December 2009

15 EQUITY

2009 2008
BD BD
15.1 SHARE CAPITAL
Authorised:
2,000,000,000 (2008: 1,200,000,000)
200,000,000 120,000,000
ordinary shares of BD 0.100 each

Issued and fully paid:

Balance at the beginning of the year
- 1,200,000,000 shares of BD 0.100 each 120,000,000 120,000,000
Issued during the year
- 225,775,075 shares of BD 0.100 each (Note 3) 22,577,508 -

142,577,508 120,000,000

Pursuant to a shareholders’ resolution (Note 3), the Bank raised its authorised capital from BD 120 million to
BD 200 million and issued 225,775,075 ordinary shares of ASBB to those shareholders of BSB who accepted
the offer. At the offer closing date, the market price of the Bank’s shares was BD 0.112 each. This resulted in
proceeds of BD 25,286,808 from the new issue, including a share premium of BD 0.012 per share aggregating
to BD 2,709,300.

15.2 STATUTORY RESERVE

As required by Bahrain Commercial Companies Law and the Bank’s articles of association, 10% of the net profit
for the year has been transferred to the statutory reserve. The Bank may resolve to discontinue such annual
transfers when the reserve totals 50% of the paid up share capital of the Bank. The reserve is not distributable
except in such circumstances as stipulated in the Bahrain Commercial Companies Law and following the
approval of the Central Bank of Bahrain.

15.3 INVESTMENT RESERVE

During the year the net unrealized gain of BD 5,772,270 (2008: net unrealized loss of BD 2,050,309) was
transferred from retained earnings to investment reserve. The reserve represents unrealised gains and losses
from revaluation of investments and investment properties carried at fair value though profit or loss, and is
not available for distribution under the Bank’s Shari’a policies until transferred back to retained earnings upon
disposal of the assets and realisation of the gains.

70 AL SALAM BANK-BAHRAIN
15 EQUITY (continued)

15.4 PROPOSED APPROPRIATIONS

The Board of Directors in its meeting on 15 February 2010 has resolved to recommend a cash dividend of 5
fils per share or 5% of the increased paid-up capital (2008: 10 fils per share) and a further 5 fils or 5% of the
paid-up capital as bonus shares, representing one bonus share for every twenty shares held subject to approval
at the forthcoming annual general meeting.

16 OTHER OPERATING INCOME

2009 2008
BD BD

Financing related fees and commissions 233,536 843,708

Transaction related fees 50,901 367,334
Fiduciary and other fees 289,966 840,504
Foreign exchange gains 337,083 249,050

911,486 2,300,596

17 RELATED PARTY TRANSACTIONS

Related parties comprise major shareholders, directors of the Group, close members of their families, entities
owned or controlled by them and companies affiliated by virtue of common ownership or directors with that
of the Group. The transactions with these parties were made on commercial terms.

The significant balances with related parties at 31 December 2009 were as follows:

2009
Associates and Directors and Senior
joint ventures related entities management Total
BD BD BD BD
Assets:
Murabaha and Mudaraba receivables 9,540,472 28,061 67,378 9,635,911
Ijarah Muntahia Bittamleek 14,097,973 3,595,657 178,189 17,871,819
Musharaka financing 5,234,068 - 99,165 5,333,233
Assets under conversion - - 27,000 27,000
Receivables and prepayments 2,733,999 8,795 14,672 2,757,466

Liabilities:
Wakala from non-banks 15,593,252 511,091 311,761 16,416,104
Customers’ current accounts 7,012,381 257,252 35,253 7,304,886
Liabilities under conversion - - 1,017,000 1,017,000
Unrestricted investment accounts 116,178 65,428 61,771 243,377

Commitments 4,623,584 - - 4,623,584

Contingent liabilities 11,402,034 55,792 - 11,457,826

AL SALAM BANK-BAHRAIN 71
 Notes to the Consolidated
Financial Statements (continued)
31 December 2009

17 RELATED PARTY TRANSACTIONS (continued)

The income and expenses in respect of related parties included in the consolidated financial statements are as
follows:
2009
Associates and Directors and Senior
joint ventures related entities management Total
BD BD BD BD
Income:
Income from other Islamic financing contracts 2,242,075 92,977 9,620 2,344,672

Expenses:
Profit paid on Wakala from non-banks 281,460 33,515 14,197 329,172
Share of profits on unrestricted
investment accounts 188 1,217 975 2,380

2008
Associates and Directors and Senior
joint ventures related entities management Total
BD BD BD BD
Assets:
Murabaha and Mudaraba receivables 7,040,472 3,693,308 60,985 10,794,765
Ijarah Muntahia Bittamleek 12,556,290 6,301,531 179,595 19,037,416
Receivables and prepayments 8,669,913 91,225 14,583 8,775,721

Liabilities:
Wakala from non-banks 26,966,966 141,577 1,031,541 28,140,084
Customer current accounts - 180,255 49,004 229,259
Unrestricted investment accounts 3,242,180 100,680 44,142 3,387,002

The income and expenses in respect of related parties included in the consolidated financial statements are as
follows:

Income:
Income from other Islamic financing contracts 605,768 419,558 15,731 1,041,057
Fees and commission income (Note 16) 40,905 - - 40,905

Expenses:
Profit paid on Wakala from non-banks 966,272 3,828 29,269 999,369
Share of profits on unrestricted
investment accounts - 192 4,879 5,071

72 AL SALAM BANK-BAHRAIN
17 RELATED PARTY TRANSACTIONS (continued)

As of 31 December 2009, Murabaha and Mudaraba receivables and Ijarah Muntahia Bittamleek included BD
3,595,657 (2008: BD3,693,308) of facilities provided to directors and their associates which are past due and
on which profit is not being recognised.

Directors are compensated in the form of fees for attending board and committee meetings. Directors’
remuneration, allowances and expenses for attending board and committee meetings for the year ended 31
December 2009 amounted to BD 250,000 (31 December 2008: BD 350,000).

Compensation of key management personnel, consisting solely of short-term benefits, paid during the year was
BD 2,182,000 (2008: BD 2,753,000).

18 CONTINGENT LIABILITIES AND COMMITMENTS

The Group has the following commitments:

2009 2008
BD BD
Contingent liabilities on behalf of customers
Guarantees 19,077,412 13,261,042
Letters of credit 1,674,596 -
Acceptances 409,000 -

21,161,008 13,261,042

Irrevocable Unutilised commitments

Unutilised financing commitments 13,473,354 2,434,840
Unutilised non-funded commitments 7,424,343 -
Unutilised capital commitments 5,681,007 5,027,488

26,578,704 7,462,328
47,739,712 20,723,370

Letters of credit, guarantees (including standby letters of credit) commit the Group to make payments on behalf
of customers contingent upon their failure to perform under the terms of the contract.

Commitments generally have fixed expiration dates, or other termination clauses. Since commitment may expire
without being drawn upon, the total contract amounts do not necessarily represent future cash requirements.

AL SALAM BANK-BAHRAIN 73
 Notes to the Consolidated
Financial Statements (continued)
31 December 2009

18 CONTINGENT LIABILITIES AND COMMITMENTS (continued)

Operating lease commitment - Group as lessee

The Group has entered into a five-year operating lease for its premises. Future minimal rentals payable under
the non-cancellable lease are as follows:

2009 2008
BD BD

Within 1 year 664,515 451,095

After one year but not more than five years 85,435 448,371

749,950 899,466

19 RISK MANAGEMENT

19.1 Introduction

Risk is inherent in the Group’s activities but it is managed through a process of ongoing identification,
measurement and monitoring, subject to risk limits and other controls. This process of risk management is
critical to the Group’s continuing profitability and each individual within the Group is accountable for the risk
exposures relating to his or her responsibilities. The Group is exposed to credit risk, liquidity risk and market
risk, the latter being subdivided into trading and non-trading risks. It is also subject to early repayment risk and
operational risks.

The independent risk control process does not include business risks such as changes in the environment,
technology and industry. They are monitored through the Group’s strategic planning process.

Risk management structure

The Board of Directors is ultimately responsible for identifying and controlling risks; however, there are separate
independent bodies responsible for managing and monitoring risks.

Board of Directors
The Board of Directors is responsible for the overall risk management approach and for approving the risk
strategies and principles.

74 AL SALAM BANK-BAHRAIN
19 RISK MANAGEMENT (continued)

19.1 Introduction (continued)

Executive Committee
The Executive Committee has the responsibility to monitor the overall risk process within the Group.

Shari’a Supervisory Board

The Group’s Shari’a Supervisory Board is entrusted with the responsibility to ensure the Group’s adherence to
Shari’a rules and principles in its transactions and activities.

Credit/ Risk Committee

Credit/ Risk committee recommends the risk policy and framework to the Board. Its primary role is selection
and implementation of risk management systems, portfolio monitoring, stress testing, risk reporting to the
Board, Board Committees, Regulators and Executive management. In addition, individual credit transaction
approval and monitoring is an integral part of the responsibilities of Credit/Risk Committee.

Asset and Liability Committee

The Asset and Liability Committee establishes policy and objectives for the asset and liability management of
the Group’s financial position in terms of structure, distribution, risk and return and its impact on profitability.
It also monitors the cash flow, tenor and cost/yield profiles of assets and liabilities and evaluates the Group’s
financial position both from profit rate sensitivity and liquidity points of view, making corrective adjustments
based upon perceived trends and market conditions, monitoring liquidity, monitoring foreign exchange
exposures and positions.

Board Audit Committee

The Audit Committee is appointed by the Board of Directors who are non-Executive Directors of the Bank.
The Board Audit Committee assists the Board in carrying out its responsibilities with respect to assessing the
quality and integrity of financial reporting, the audit thereof, the soundness of the internal controls of the
Group, the measurement system of risk assessment and relating these to the Group’s capital, and the methods
for monitoring compliance with laws, regulations and supervisory and internal policies.

Internal Audit
Risk management processes throughout the Group are audited by the internal audit function, that examines
both the adequacy of the procedures and the Group’s compliance with the procedures. Internal Audit discusses
the results of all assessments with management, and reports its findings and recommendations to the Audit
Committee.

Risk measurement and reporting systems

The Group’s risks are measured using a method which reflects both the expected loss likely to arise in normal
circumstances and unexpected losses, which are an estimate of the ultimate actual loss based on statistical
models. The models make use of probabilities derived from historical experience, adjusted to reflect the
economic environment. The Group also runs worse case scenarios that would arise in the event that extreme
events which are unlikely to occur do, in fact, occur.

AL SALAM BANK-BAHRAIN 75
 Notes to the Consolidated
Financial Statements (continued)
31 December 2009

19 RISK MANAGEMENT (continued)

19.1 Introduction (continued)

Risk measurement and reporting systems (continued)

Monitoring and controlling risks is primarily performed based on limits established by the Group. These limits
reflect the business strategy and market environment of the Group as well as the level of risk that the Group
is willing to accept, with additional emphasis on selected industries. In addition, the Group monitors and
measures the overall risk bearing capacity in relation to the aggregate risk exposure across all risk types and
activities.

Information compiled from all the businesses is examined and processed in order to analyse, control and
identify early risks. This information is presented and explained to the Board of Directors, the Credit / Risk
Committee, and the head of each business division. The report includes aggregate credit exposure, credit metric
forecasts, hold limit exceptions, liquidity ratios and risk profile changes. On a monthly basis detailed reporting
of industry, customer and geographic risks takes place. Senior management assesses the appropriateness of the
allowance for credit losses on a quarterly basis. The Board of Directors receives a comprehensive risk report
once a quarter which is designed to provide all the necessary information to assess and conclude on the risks
of the Group.

For all levels throughout the Group, specifically tailored risk reports are prepared and distributed in order
to ensure that all business divisions have access to extensive, necessary and up-to-date information. A daily
briefing is given to the Chief Financial Officer and all other relevant members of the Group on the utilisation of
market limits, proprietary investments and liquidity, plus any other risk developments.

Excessive risk concentration

Concentrations arise when a number of counterparties 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
indicate the relative sensitivity of the Group’s performance to developments affecting a particular industry or
geographical location.

In order to avoid excessive concentrations of risk, the Group’s policies and procedures include specific
guidelines to focus on maintaining a diversified portfolio. Identified concentrations of credit risks are controlled
and managed accordingly.

76 AL SALAM BANK-BAHRAIN
19 RISK MANAGEMENT (continued)

19.2 CREDIT RISK

Credit risk is the risk that one party to a financial contract will fail to discharge an obligation and cause the other
party to incur a financial loss. The Group attempts to control credit risk by monitoring credit exposures, setting
limits for transactions with counterparties, and continually assessing the creditworthiness of counterparties.

In addition to monitoring credit limits, the Group manages the credit exposures by entering into collateral
arrangements with counterparties in appropriate circumstances and by limiting the duration of the exposure.

Maximum exposure to credit risk without taking account of any collateral and other credit enhancements

The table below shows the maximum exposure to credit risk for the components of the consolidated statement
of financial position. The maximum exposure is shown gross, before the effect of mitigation through the use of
master netting and collateral agreements.

Gross maximum Gross maximum

exposure 2009 exposure 2008
Notes BD BD
ASSETS
Balances with other banks 4,755,925 3,389,696
Murabaha receivables from banks 6 149,303,782 87,167,449
Corporate sukuk 16,949,546 -
Murabaha and Mudaraba receivables 7 58,352,606 52,058,745
Ijarah Muntahia Bittamleek 8 42,341,351 37,688,214
Musharaka financing 5,384,369 -
Assets under conversion 9 77,972,000 -
Receivables 12 26,011,951 20,115,783
Assets held-for-sale - 88,934,033
Total 381,071,530 289,353,920
Contingent liabilities and commitments 48,489,662 7,462,328
Total credit risk exposure 429,561,192 296,816,248

Where financial instruments are recorded at fair value the amounts shown above represent the current credit
risk exposure but not the maximum risk exposure that could arise in the future as a result of changes in values.

Type of credit risk

Various contracts entered into by the Bank comprise Murabaha receivables, Mudaraba investments, Musharaka
receivables, and Ijarah Muntahia Bittamleek contracts. Murabaha receivables contracts cover land, buildings,
commodities, motor vehicles and others. Mudaraba investments consist of financing transactions entered
through other Islamic banks and financial institutions. The various financial instruments are:

AL SALAM BANK-BAHRAIN 77
 Notes to the Consolidated
Financial Statements (continued)
31 December 2009

19 RISK MANAGEMENT (continued)

19.2 CREDIT RISK (continued)

Murabaha receivables
The Bank arranges Murabaha transactions by buying an asset (which represents the object of the Murabaha)
and then selling this asset to customers (beneficiary) after adding a margin of profit over the cost. The sale price
(cost plus profit margin) is repaid in installments over the agreed period.

Ijarah Muntahia Bittamleek

The legal title of the leased asset under Ijarah Muntahia Bittamleek passes to the lessee at the end of the Ijarah
term, provided that all Ijarah installments are settled and the lessee purchases the asset.

a) The credit quality of Balances with Banks and Murabaha receivables from banks subject to credit risk is as
follows:

31 December 2009
Neither past due nor impaired Past due or
individually
‘A’ Rated ‘B’ Rated Unrated impaired Total
BD BD BD BD BD

Balances with Banks 4,402,197 106,333 247,395 - 4,755,925

Murabaha receivables from banks 93,228,373 11,465,654 44,609,755 - 149,303,782

97,630,570 11,571,987 44,857,150 - 154,059,707

31 December 2008
Neither past due nor impaired Past due or
individually
‘A’ Rated ‘B’ Rated Unrated impaired Total
BD BD BD BD BD

Balances with Banks 3,175,883 165,353 48,460 - 3,389,696

Murabaha receivables from banks 60,638,666 7,540,000 18,988,783 - 87,167,449

63,814,549 7,705,353 19,037,243 - 90,557,145

78 AL SALAM BANK-BAHRAIN
19 RISK MANAGEMENT (continued)

19.2 CREDIT RISK (continued)

The ratings referred to in the above tables are by one or more of the 4 international rating agencies (Standards
& Poors, Moody’s, Fitch and Capital Intelligence). The unrated exposures are with various high quality Middle
East financial institutions, which are not rated by a credit rating agency. In the opinion of the management,
these are equivalent to “A” rated banks.

b) The credit quality of Corporate sukuk, Murabaha and Mudaraba receivables, Ijarah Muntahia Bittamleek,
Musharaka financing, Assets under conversion and Receivables that are subject to credit risk, based on internal
credit ratings, is as follows:

31 December 2009
Neither past due nor impaired
Substandard but Past due but not
Satisfactory Watch List not impaired impaired Total
BD BD BD BD BD

Corporate sukuk 16,949,546 - - - 16,949,546

Murabaha and
37,511,971 7,539,492 - 13,301,143 58,352,606
Mudaraba receivables
Ijarah Muntahia Bittamleek 31,646,790 - 3,960,000 6,734,561 42,341,351
Musharaka financing 5,384,369 - - - 5,384,369
Assets under conversion 77,972,000 - - - 77,972,000
Receivables 26,011,951 - - - 26,011,951

195,476,627 7,539,492 3,960,000 20,035,704 227,011,823

31 December 2008
Neither past due nor impaired
Substandard but Past due but
Satisfactory Watch List not impaired not impaired Total
BD BD BD BD BD

Murabaha and
66,756,279 - - 5,727,466 72,483,745
Mudaraba receivables
Ijarah Muntahia Bittamleek 41,507,924 - - 22,860 41,530,784

108,264,203 - - 5,750,326 114,014,529

All internal risk ratings are tailored to the various categories and are derived in accordance with the Group’s
rating policy. The attributable risk ratings are assessed and updated regularly.

AL SALAM BANK-BAHRAIN 79
 Notes to the Consolidated
Financial Statements (continued)
31 December 2009

19 RISK MANAGEMENT (continued)

19.2 CREDIT RISK (continued)

c) Past due but not impaired Murabaha and Mudaraba receivables, and Ijarah Muntahia Bittamleek are
analysed as follows:

31 December 2009
0-30 days 31-90 days > 90 days Total
BD BD BD BD

Murabaha and
1,740,965 4,609,596 6,950,582 13,301,143
Mudaraba receivables
Ijarah Muntahia Bittamleek 1,724,478 692,024 4,318,059 6,734,561

3,465,443 5,301,620 11,268,641 20,035,704

31 December 2008
0-30 days 31-90 days > 90 days Total
BD BD BD BD

Murabaha and
- 2,034,158 3,693,308 5,727,466
Mudaraba receivables
Ijarah Muntahia Bittamleek 22,860 - - 22,860

22,860 2,034,158 3,693,308 5,750,326

All the past due but not impaired Murabaha and Mudaraba receivables and Ijarah financing are covered by
collateral of BD 42,034,664 (2008: BD 8,901,056).

The maximum credit risk, without taking into account the fair value of any collateral and Shari’a-compliant
netting agreements, is limited to the amounts on the statement of financial position plus commitments to
customers disclosed in Note 18 except capital commitments.

During the year BD 9,520,469 (2008: BD 2,350,000) of financing facilities to individuals were renegotiated.
All renegotiated facilities are performing and are fully secured.

At 31 December 2009, the amount of credit exposure in excess of 10% of the Group’s equity to individual
counterparties was nil (2008: nil).

At 31 December 2009, impaired financial assets of the Group amounted to BD 59,387,000 (2008: Nil) against
which provision of BD 47,507,000 (2008: Nil) was held.

80 AL SALAM BANK-BAHRAIN
19 RISK MANAGEMENT (continued)

19.3 Legal risk and claims

Legal risk is the risk arising from the potential that unenforceable contracts, lawsuits or adverse judgments
can disrupt or otherwise negatively affect the operations of the Group. The Group has developed controls and
procedures to identify legal risks and believes that losses will be minimized.

As at 31 December 2009, legal suits amounting to BD 1,681 thousand (2008: BD 1,661 thousand) were
pending against the Group. Based on the opinion of the Group’s legal counsel, the total estimated liability
arising from these cases is not considered to be material to the Group’s financial position as the Group also has
filed counter cases against these parties.

20 CONCENTRATIONS

Concentrations arise when a number of counterparties 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
indicate the relative sensitivity of the Group’s performance to developments affecting a particular industry or
geographic location. The Group manages its credit risk exposure through diversification of financing activities
to avoid undue concentrations of risks with customers in specific locations or businesses.

The distribution of assets, liabilities and unrestricted investment accounts by geographic region and industry
sector was as follows:

Liabilities, Liabilities,
unrestricted unrestricted
investment Contingent investment
accounts liabilities and accounts
Assets and equity Commitments Assets and equity Commitments
2009 2009 2009 2008 2008 2008
BD BD BD BD BD BD
Geographic region
GCC 718,880,971 560,808,591 32,549,873 502,539,276 357,555,010 2,465,607
Arab World 9,565,905 2,791,538 - 9,917,696 4,978,221 -
Europe 23,087,333 11,641,916 48,252 6,106,964 6,856,091 -
Asia 27,105,676 8,734,207 12,346,647 32,222,098 12,600,551 2,278,578
America 2,274,539 179,728 - 1,709,064 7,204 -
Others 5,019,859 - 3,544,890 1,985,460 - 2,718,143

785,934,283 584,155,980 48,489,662 554,480,558 381,997,077 7,462,328

Equity - 201,778,303 - - 172,483,481 -

785,934,283 785,934,283 48,489,662 554,480,558 554,480,558 7,462,328

AL SALAM BANK-BAHRAIN 81
 Notes to the Consolidated
Financial Statements (continued)
31 December 2009

20 CONCENTRATIONS (continued)

Liabilities, Liabilities,
unrestricted Contingent unrestricted
investment liabilities and investment
accounts Commit- accounts
Assets and equity ments Assets and equity Commitments
2009 2009 2009 2008 2008 2008
BD BD BD BD BD BD

Industry sector
Trading and
manufacturing 10,418,502 15,798,137 16,626,581 12,752,030 423,602 48,789
Banks and financial
institutions 257,170,260 143,696,752 344,000 109,199,534 72,547,160 -
Real estate 188,081,853 60,406,242 23,331,597 167,869,248 68,098,462 4,242,721
Aviation 10,373,462 8,536 - 5,090,915 1,025,554 -
Individuals 45,768,760 206,897,595 1,726,150 23,199,665 106,905,733 1,167,200
Government and
public sector 127,925,297 87,211,278 - 135,204,195 97,537,011 1,218,851
Others 146,196,149 70,137,440 6,461,334 101,164,971 35,459,555 784,767

785,934,283 584,155,980 48,489,662 554,480,558 381,997,077 7,462,328

Equity - 201,778,303 - - 172,483,481 -

785,934,283 785,934,283 48,489,662 554,480,558 554,480,558 7,462,328

21 MARKET RISK

Market risk arises from fluctuations in global yields on financial instruments and foreign exchange rates that
could have an indirect effect on the Group’s assets value and equity prices. The Board has set limits on the risk
that may be accepted. This is monitored on a regular basis by the Asset and Liability Committee of the Group.

21.1 EQUITY PRICE RISK

Equity price risk arises from fluctuations in equity prices. The Board has set limits on the amount and type of
investments that may be accepted. This is monitored on an ongoing basis by the Group’s Investment Committee.

82 AL SALAM BANK-BAHRAIN
21 MARKET RISK (continued)

21.1 EQUITY PRICE RISK (continued)

The effect on income (as a result of changes in the fair values of non-trading investments held at fair value
through profit or loss and assets held for sale) solely due to reasonably possible changes in equity prices, is as
follows:

2009
10% increase 10% decrease
Effect on Effect on
Effect on Comprehensive Effect on Comprehensive
net profit income net profit income
BD BD BD BD
Quoted:
GCC 434,194 172,700 (434,194) (172,700)
Unquoted 18,033,788 1,514,600 (18,033,788) (1,514,600)

2008
10% increase 10% decrease
Effect on Effect on
Effect on Comprehensive Effect on Comprehensive
net profit income net profit income
BD BD BD BD
Quoted:
GCC 404,564 - (404,564) -
Unquoted 11,288,386 - (11,288,386) -

Assets under conversion (Note 9) include quoted equites of BD 1,727,000 (2008: Nil) and unquoted equites of
BD 15,146,000 (2008: Nil). In determining the effect of price volatility on above, equity positions included in
assets under conversion have been considered.

21.2 PROFIT RETURN RISK

The Group has exposure to fluctuations in the profit rates on its assets and liabilities. The Group recognises
income on certain financial assets on a time-apportioned basis. The Group has set limits for profit return risk
and these are monitored on an ongoing basis by the Group’s Asset Liability Committee (ALCO).

The Group manages exposures to the effects of various risks associated with fluctuations in the prevailing levels
of market profit rates on its financial position and cash flows.

The effect on income solely due to reasonably possible immediate and sustained changes in profit return rates,
affecting both floating rate assets and liabilities and fixed rate assets and liabilities with maturities less than one
year are as follows:

AL SALAM BANK-BAHRAIN 83
 Notes to the Consolidated
Financial Statements (continued)
31 December 2009

21 MARKET RISK (continued)

21.2 PROFIT RETURN RISK (continued)

2009
Change in Effect on Change in Effect on
rate net profit rate net profit
% BD % BD
US dollars 0.25 179,609 (0.25) (179,609)
Bahraini dinars 0.25 344,051 (0.25) (344,051)

2008
Change in Effect on Change in Effect on
rate net profit rate net profit
% BD % BD
US dollars 0.25 506,153 (0.25) (506,153)
Bahraini dinars 0.25 1,656,026 (0.25) (1,656,026)

In addition to profit rate bearing financing contracts considered in ariving at the effect on net profits, the assets
under conversion includes BD 81,088,000 of financial assets and BD 120,001,000 of financial liabilities which
are interest bearing. The Group is in the process of converting these into Shari’a compliant contracts. If all the
interest bearing assets and liabilities were converted into Shari’a complaint contract on 1 January 2010, the
change in profit rate by 0.25% would result in a profit or loss of BD 97,283.

21.3 CURRENCY RISK

Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange
rates. The Board has set limits on positions by currency. Positions are monitored on a periodic basis by the
Group’s Asset Liability Committee to ensure positions are maintained within established limits.

Substantial portion of the Group’s assets and liabilities are denominated in Bahrain dinars or US dollars. The
Group had the following significant net long positions in foreign currencies as of 31 December:

2009 2008
BD BD

US Dollars 10,402,462 17,090,387

Saudi Riyals 55,801,876 57,553,210

84 AL SALAM BANK-BAHRAIN
21 MARKET RISK (continued)

21.3 CURRENCY RISK (continued)

The effect on income solely due to reasonably possible immediate and sustained changes in exchange rates is
as follows:

2009
Change in Effect on Change in Effect on
rate net profit rate net profit
% BD % BD
US dollars to Bahraini dinars 1 104,025 (1) (104,025)
Saudi Riyals to Bahraini dinars 1 558,019 (1) (558,019)

2008
Change in Effect on Change in Effect on
Saudi Riyals to Bahraini dinar rate net profit rate net profit
% BD % BD
US dollars to Bahraini dinars 1 170,904 (1) (170,904)
Saudi Riyals to Bahraini dinars 1 575,532 (1) (575,532)

AL SALAM BANK-BAHRAIN 85
 Notes to the Consolidated
Financial Statements (continued)
31 December 2009

22 LIQUIDITY RISK

Liquidity risk is the risk that the Group will be unable to meet its liabilities as they fall due. Liquidity risk
can be caused by market disruptions or credit downgrades which may impact certain sources of funding.
To mitigate this risk, management has diversified funding sources and assets are managed with liquidity in
mind, maintaining an adequate balance of cash, cash equivalents and readily marketable securities. Liquidity
position is monitored on an ongoing basis by the Group’s Asset Liability Committee.

The table below summarises the expected maturity profile of the Group’s assets and liabilities as at 31 December
2009 and 2008:

31 December 2009
Up to 3 months 1 to 5 Over 5
Total
3 months to 1 year years years
BD
BD BD BD BD
ASSETS
Cash and balances with
Central Bank of Bahrain 109,372,202 - 17,367,000 - 126,739,202
Central Bank of Bahrain
Sukuk - 32,907,875 - - 32,907,875
Murabaha receivables from banks 149,303,782 - - - 149,303,782
Corporate Sukuk - - 16,949,546 - 16,949,546
Murabaha and Mudaraba receivables 20,096,505 14,665,487 52,511,833 - 87,273,825
Ijarah Muntahia Bittamleek 7,062,692 10,120,788 22,179,292 6,951,879 46,314,651
Musharaka financing 5,323 15,894 5,363,152 - 5,384,369
Assets under conversion 30,901,000 17,156,000 50,248,000 - 98,305,000
Non-trading investments - - 184,679,822 - 184,679,822
Investment in an associate - - 7,659,055 - 7,659,055
Investment properties - - - 1,177,528 1,177,528
Receivables and prepayments 25,233,471 1,129,996 538,725 - 26,902,192
Premises and equipment - - 2,337,436 - 2,337,436
341,974,975 75,996,040 359,833,861 8,129,407 785,934,283

LIABILITIES AND UNRESTRICTED

INVESTMENT ACCOUNTS
Murabaha and Wakala payables
- - 89,397,722 - 89,397,722
to banks
Wakala from non-banks - 47,882,064 269,487,521 - 317,369,585
Customers’ current accounts 32,699,944 - - - 32,699,944
Liabilities under conversion 87,810,000 14,120,000 18,472,000 - 120,402,000
Other liabilities 13,512,479 1,096,818 267,965 - 14,877,262
Unrestricted investment accounts - - 9,409,467 - 9,409,467
134,022,423 63,098,882 387,034,675 - 584,155,980

86 AL SALAM BANK-BAHRAIN
22 LIQUIDITY RISK (continued)

31 December 2008

Up to 3 months 1 to 5 Over 5
Total
3 months to 1 year years years
BD
BD BD BD BD

ASSETS

Cash and balances with

Central Bank of Bahrain 83,533,981 - - - 83,533,981

Central Bank of Bahrain

Sukuk - 6,620,000 24,475,000 - 31,095,000
Murabaha receivables from banks 87,167,449 - - - 87,167,449
Murabaha and Mudaraba receivables 29,807,777 16,005,000 26,555,359 115,609 72,483,745
Ijarah Muntahia Bittamleek 6,022,862 3,892,912 26,505,879 5,109,131 41,530,784
Non-trading investments - - 116,929,500 - 116,929,500
Investment in an associate - - - 8,011,913 8,011,913
Investment properties - - - 1,177,528 1,177,528
Receivables and prepayments 20,055,603 256,556 720,670 - 21,032,829
Premises and equipment - - 2,583,796 - 2,583,796
Assets held-for-sale - 19,715,428 69,218,605 - 88,934,033

226,587,672 46,489,896 266,988,809 14,414,181 554,480,558

LIABILITIES AND UNRESTRICTED

INVESTMENT ACCOUNTS

Murabaha and Wakala payables

- - 32,880,685 - 32,880,685
to banks

Wakala from non-banks - 97,980,280 191,024,490 - 289,004,770

Customers’ current accounts - - 42,985,844 - 42,985,844
Other liabilities 10,182,013 573,360 186 - 10,755,559
Unrestricted investment accounts - - 6,370,219 - 6,370,219

10,182,013 98,553,640 273,261,424 - 381,997,077

AL SALAM BANK-BAHRAIN 87
 Notes to the Consolidated
Financial Statements (continued)
31 December 2009

22 LIQUIDITY RISK (continued)

The table below summarizes the maturity profile of the Group’s financial liabilities at 31 December, 2009 and
2008 based on contractual undiscounted repayment obligation:

31 December 2009
On Up to 3 months 1 to 5
demand 3 months to 1 year years Total
BD BD BD BD BD
LIABILITIES, UNRESTRICTED INVESTMENT
ACCOUNTS COMMITMENTS AND CONTINGENT LIABILITIES
Murabaha and Wakala payables
- 89,397,722 - - 89,397,722
to banks
Wakala from non-banks - 250,849,368 47,882,064 18,638,153 317,369,585
Customers’ current accounts 32,699,944 - - - 32,699,944
Liabilities under conversion - 87,810,000 14,120,000 18,472,000 120,402,000
Unrestricted investment accounts - 9,409,467 - - 9,409,467
Unutilised financing commitments 13,749,000 - 3,052,062 4,096,635 20,897,697
Unutilised capital commitments - - 3,544,890 2,136,117 5,681,007
Contingent liabilities 19,119,412 538,000 1,503,596 - 21,161,008
Other Liabilities - 9,592,243 435,818 598,975 10,627,036
Profit due on financing contracts - 986,136 2,167,981 2,882,088 6,036,205

65,568,356 448,582,936 72,706,411 46,823,968 633,681,671

31 December 2008
On Up to 3 months 1 to 5
demand 3 months to 1 year years Total
BD BD BD BD BD
LIABILITIES, UNRESTRICTED INVESTMENT
ACCOUNTS AND COMMITMENTS
Murabaha and Wakala payables
- 32,880,685 - - 32,880,685
to banks
Wakala from non-banks - 218,957,897 68,928,893 1,117,980 289,004,770
Customers’ current accounts - 42,985,844 - - 42,985,844
Unrestricted investment accounts - 6,370,219 - - 6,370,219
Unutilised financing commitments - - 2,434,840 - 2,434,840
Unutilised capital commitments - - 777,766 4,249,722 5,027,488
Profit due on financing contracts - - 1,213,866 - 1,213,866

- 301,194,645 73,355,365 5,367,702 379,917,712

88 AL SALAM BANK-BAHRAIN
23 SEGMENT INFORMATION

Primary segment information

For management purposes, the Group is organised into four major business segments:

Banking - principally managing Shari’a compliant profit sharing investment accounts, and offering
Shari’a compliant financing contracts and other Shari’a-compliant products. This segment
comprises corporate banking, retail banking and private banking and wealth management.

Treasury - principally handling Shari’a-compliant money market, trading and treasury services
including short-term commodity Murabaha.

Investments - principally the Banks’ proprietary portfolio and serving clients with a range of investment
products, funds and alternative investments.

Capital - manages the undeployed capital of the bank by investing it in high quality financial
instruments, incurs all expenses in managing such investments and accounts for the
capital governance related expenses.

These segments are the basis on which the Group reports its primary segment information. Transactions between
segments are conducted at estimated market rates on an arm’s length basis. Transfer charges are based on a
pool rate which approximates the cost of funds.

Segment information for the year ended 31 December 2009 was as follows:

31 December 2009

Banking Treasury Investments Capital Total

BD BD BD BD BD
Operating income 7,887,189 2,499,936 5,583,228 7,709,233 23,679,586
Segment result 4,101,065 1,492,838 2,709,240 5,659,272 13,962,415
Other information
Segment assets 208,248,481 336,170,782 171,962,098 69,552,922 785,934,283
Segment liabilities, and equity 471,408,521 103,403,261 984,408 210,138,093 785,934,283

31 December 2008
Banking Treasury Investments Capital Total
BD BD BD BD BD
Operating income 12,358,078 1,363,925 11,360,600 12,518,655 37,601,258
Segment result 8,053,899 131,570 8,111,172 9,246,040 25,542,681
Other information
Segment assets 111,419,675 206,307,380 164,730,985 72,022,518 554,480,558
Segment liabilities, and equity 332,442,317 41,505,053 1,000,000 179,533,188 554,480,558

AL SALAM BANK-BAHRAIN 89
 Notes to the Consolidated
Financial Statements (continued)
31 December 2009

23 SEGMENT INFORMATION (continued)

Secondary segment information

The Group primarily operates in the GCC and derives substantially all its operating income and incurs all
operating expenses in the GCC.

24 FIDUCIARY ASSETS

Funds under management at the year-end amounted to BD 60,706,388 (2008: BD 25,000,000). These assets
are held in a fiduciary capacity and are not included in the consolidated statement of financial position.

25 SHARI’A SUPERVISORY BOARD

The Bank’s Shari’a Supervisory Board consists of four Islamic scholars who review the Group’s compliance with
general Shari’a principles and specific fatwa’s, rulings and guidelines issued by the Bank’s Shari’a supervisory
Board. Their review includes examination of evidence relating to the documentation and procedures adopted
by the Group to ensure that its activities are conducted in accordance with Islamic Shari’a principles.

26 FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair value of the Group’s financial instruments are not significantly different from their carrying
values as at 31 December 2009 and 2008.

27 EARNINGS AND EXPENSES PROHIBITED BY SHARI’A

As explained in Note 3, the Bank acquired a 90.31% stake in BSB. Effective 28 October 2009, the Bank
established control over the subsidiary. Since the subsidiary is still in the process of being converted into
an Islamic bank, the share of post acquisition net profit of BD 18,965 derived from non-Shari’a compliant
transactions, has been set aside for charity.

In addition to the above, the Bank received income totaling BD 55,724 (2008: BD 2,767) from conventional
financial institutions on current account balances during the year. These funds were held as payable to charity
as they are in the nature of Shari’a prohibited income.

28 SOCIAL RESPONSIBILITY

The Group discharges its social responsibility through charity fund expenditures and donations to the good
faith qard fund which is used for charitable purposes. During the year the Group paid an amount of BD
914,983 (2008: BD 536,084) on account of charitable donations.

90 AL SALAM BANK-BAHRAIN
29 ZAKAH

Pursuant to a resolution of the shareholders in an EGM held on 12 November 2009, it was resolved to amend
the articles of association of the Bank to inform the shareholders of their obligation to pay Zakah on income
and net worth. Consequently, Zakah is not recognized in the consolidated income statement as an expense.
The total Zakah payable by the shareholders for 2009 has been determined by the Shari’a supervisory board
as BD 571,532 or 0.40 fils per share. In 2008, a sum of BD 822,525 was contributed by the Bank with an
obligation of BD 615,249 or 0.51 fils per share payable by the shareholders.

30 CAPITAL ADEQUACY

The adequacy of the Group’s capital is monitored using, primarily, the rules and ratios established by the Basel
Committee on Grouping Supervision and adopted by the Central Bank of Bahrain. The primary objective of
the Group’s capital management is to ensure that it complies with externally imposed capital requirements. The
Group complied in full with all externally imposed capital requirements during the years ended 31 December
2009 and 31 December 2008.

The risk assets ratio calculations, in accordance with the ‘Basel II’ capital adequacy guidelines of the Central
Bank of Bahrain are as follows:

2009 2008
BD BD

Capital base (Tier 1) 179,564,000 107,989,000

Credit risk weighted exposures 555,389,000 393,251,000

Market risk weighted exposures 2,950,000 3,213,000
Operational risk weighted exposures 68,803,000 40,410,000

Total risk weighted exposure 627,142,000 436,874,000

Capital adequacy 28.6% 24.7%

Minimum requirement 12.0% 12.0%

AL SALAM BANK-BAHRAIN 91