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
Our Projects
Contents

8 Corporate Overview

9 Annual Highlights

10 Board of Directors

16 Fatwa and Shari’a Supervisory Board

18 Group Executive Management Team

22 Board of Directors’ Report to the Shareholders

26 Message from the Chief Executive Officer

28 Management Review of Operations & Activities

34 Corporate Governance

42 Risk Management and Compliance

46 Corporate Social Responsibility

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

50 Independent Auditors’ Report to the Shareholders

51 Consolidated Financial Statements

58 Notes to the Consolidated Financial Statements

AL SALAM BANK-BAHRAIN 5
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 commensurate with the risks undertaken.

Dynamic - Diversified - Differentiated

Dynamic - Diversified - Differenti

AL SALAM BANK-BAHRAIN 7
 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. 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 adopts 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.

8 AL SALAM BANK-BAHRAIN
Annual Highlights

Key Financial Indicators

USD 1,471

USD 2,085

USD 2,273
BD37.6

BD23.7

BD22.4

BD25.5

BD14.0
USD 99.7

USD 62.9

USD 59.4

USD 67.8

USD 37.0

USD 19.4

BD554

BD786

BD857
BD7.3

2008 2009 2010 2008 2009 2010 2008 2009 2010

Total Operating Income (million) Net Profit (million) Total Assets (million)
BD172.5

BD201.8

BD202.6
USD 457.5

USD 535.2

USD 537.4

31.3%

40.9%

60.6%
21 Fils

10 Fils

5 Fils

2008 2009 2010 2008 2009 2010 2008 2009 2010

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

AL SALAM BANK-BAHRAIN 9
 Guiding the Vision to Success
Board of Directors

H. E. Mohamed Ali
Rashid Alabbar

Shaikha Hessa
bint Khalifa
Salman Saleh Al Khalifa
Al Mahmeed

Hamad Tarek Habib Ahmed

Terence
Alhomaizi Kassem
D. Allen

10 AL SALAM BANK-BAHRAIN
Sheikh
Abedlelah Kaki Fahad Sami
Al Ebrahim
Yousif Abdulla
Essam bin
Taqi
Abdulkadir
Al Muhaidib Ahmed Jamal
Jawa

Khalid Ahmed
Abdulla Al Ashar

AL SALAM BANK-BAHRAIN 11
 Guiding the Vision to Success
Board of Directors (continued)

H. E. Mohamed H.E. Mohamed Alabbar is the founding member and Chairman of Emaar Properties PJSC,
Ali Rashid the Dubai-based global property developer. He serves on the board of directors of the
Alabbar Investment Corporation of Dubai (ICD), the investment arm of the Government of Dubai.
Chairman 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
Independent and
Administration from Seattle University in the United States, Mr. Alabbar works closely
non-executive
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.
Term started:
18 April 2009

Habib Ahmed Habib Kassem is the Chairman of Almahd Investment Company, Bahrain Ferro Alloys,
Kassem Bahrain Electricity Supply & Transmission Company, Capital Growth Management and
Vice Chairman 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
Independent and
1976 to 1995, and Member of the GCC Consultative Council for the Supreme Council
non-executive
from 1997-2007.

Term started:
18 April 2009

Sheikh Sheikh Abedlelah Kaki has more than 35 years experience in banking, trading & industry.
Abedlelah He is the Chairman of Saudi International Trading & Marketing Ltd. AMK Gulf for
Mohammed Investments & International Agencies Co. Ltd. and United Gulf Industries Ltd in Saudi
Saleh Kaki Arabia, Marsh Saudi Arabia Insurance & Reinsurance Broking, Marsh Insurance Consulting
Director 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
Independent and
Mediterranean Agricultural Products Co (MAPCO) in Egypt. He is an active board member
non-executive
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
Term started:
Cement Company in Saudi Arabia. Sheikh Kaki is a graduate in Economics from United
15 February 2010
States International University in California, United States of America.

12 AL SALAM BANK-BAHRAIN
 Shaikha Hessa An active member of the royal family of the Kingdom of Bahrain, Shaikha Hessa gained
bint Khalifa bin her Bachelor’s degree in Management (1998), and her Masters degree in Social Policy and
Hamad Al Khalifa Planning (2002) both from the London School of Economics and Political Science. Gained
Director a MSC Development Finance 2010 from University of London. She joined the Supreme
Council for Women in 2001 as a member of the Social Committee. Since 2004 she has
Independent and
been a Permanent Member of the Council’s Board. In 2005, she founded “inJAz Bahrain”
non-executive
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
Term started:
active role in enterprise education and developing skills of young women, she has been
18 April 2009
invited as speaker and panelist at various occasions including the UN, and the World
Economic Forum.

Essam bin Mr. Essam Al Muhaidib is CEO of A.K. Al Muhaidib & Sons Group, and Board of Directors
Abdulkadir member in several organizations having interests in banking & insurance, FMCG & retail,
Al Muhaidib building & construction, industrial, real estate apart from educational, charitable and
Director benevolent organizations. Emmar Middle East, United Sugar Company, Amwal Al Khaleej,
Saudi Tabreed Company, Synthomer Middle East, Nestle Co, Damas Co , Al Oula Real
Independent and
Estate Development Co, Dubai Contracting Company (DCC), Al Salam Bank, Gulf Union
non-executive
Insurance Company, Al Massa International Inc-Canada, Dnata Kuwait, Saudi Fisheries
company, Aziziah Panda United Co, Savola Foods Co, Al Latifia Trading & Contracting Co.
Term started:
Moreover, he is also a member in some of charitable and non profitable & educational
18 April 2009
organizations such as King Fahad University of Petroleum & Minerals Endowment Fund,
board of directors of the educational services company at Prince Mohammad bin Fahad in
Dammam as well as founder for Prince Sultan college for Prince Sultan Ladies’ Fund.

Salman Saleh Salman Al Mahmeed is the Deputy Chief Executive Officer of Bahrain Airport Services, the
Al Mahmeed Deputy Charmin of Dar Albilad, the Managing Director and Owners’ Representative of
Director 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
Independent and
Options Committees. He was also the Investment Director of Managa Holdings. Mr. Al
non-executive
Mahmeed holds an MBA in Business Administration, Master in Hotel Management and
BSc. degree in Administration from Cairo University.
Term started:
15 February 2010

AL SALAM BANK-BAHRAIN 13
 Guiding the Vision to Success
Board of Directors (continued)

Fahad Sami Fahad Al Ebrahim, with more than 9 years of professional experience, is currently the
Al Ebrahim Vice President - Regional Client Relationship of Global Investment House (GIH). He is a
Director 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
Independent and
wealth management groups specialized in looking after the international clients who are
non-executive
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
Term started:
is a graduate from the University of Oregon with an emphasis in communication studies
18 April 2009
and holds a post-graduate degree in business administration from the Maastricht School
of Management.

Hamad Tarek Hamad Alhomaizi has a BS in Computer Science and Business Administration from George
Alhomaizi Washington University and has a strong IT background and technical understanding
Director 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
Independent and
capacities from Board level to analyst in various companies and was a founding Board
non-executive
Member in companies including Shuwaikh Real Estate Projects Company (Kuwait), Ishraq
Term started: Real Estate Company (Bahrain / UAE) and Al Shaab Holding Company (Kuwait).
18 April 2009

Ahmed Jamal A graduate in Business Administration with an MBA from the University of San Francisco,
Jawa Mr. Jawa has served on the boards of the Novapark Swiss Hotel Group; Mirapolice, and
Director Tricon Group, US. Mr. Jawa is President, CEO and Board Member of Starling Holding
Ltd, and President of Contracting and Trading Company (CTC), Saudi Arabia. Mr. Jawa
Independent and
is Board Member of Emaar Properties PJSC. He is also Chairman of the Nomination and
non-executive
Remuneration Committee, as well as a member of the Audit Committee.
He is a Board Member of Emaar the Economic City and Chairman of the Nomination and
Term started:
Remuneration Committee. He is a Board Member of Emaar Turkey and serves on the board
18 April 2009
of Emaar MGF India, Emaar Egypt and Emaar Cham, Syria. He is also a Board Member of
RAK Petroleum. The World Economic Forum had honored Mr. Jawa as one of the Global
Leaders of tomorrow in February 2006.

14 AL SALAM BANK-BAHRAIN
 Terence D. Mr. Allen has more than 40 years of experience in the treasury and investment banking
Allen business. He is the founder and Managing Director of Allied Investment Partners PJSC a
Director UAE based merchant banking company with diversified group holdings. He has spent
several years in the private fund management business, where he was a Director of
Independent and
several asset and fund management companies. In the past he has been appointed as
non-executive
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
Term started:
for newspapers and journals ranging from military history to financial and banking topics.
18 April 2009

Yousif Abdulla A Certified Public Accountant (CPA), Mr. Taqi has been active in the banking and financial
Taqi services industry since 1983. During his career, Mr. Taqi worked in leading positions for a
Director & Chief number of institutions in the Kingdom of Bahrain. Prior to joining Al Salam Bank-Bahrain,
Executive Officer 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
Executive
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
Term started:
promoted to Partner, responsible for providing auditing and consultancy services to the
18 April 2009
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).

Khalid Ahmed Mr. Al Ashar holds a BSc in Commerce and Business Administration from Beirut Arab
Abdulla Al Ashar University. He previously worked in the Operations Department at the Bank of Bahrain
Secretary to the and Kuwait and Arab Banking Corporation. He also held the position of Director of Human
Board 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 15
 Fatwa and Shari’a Supervisory Board

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
Dr. Hussain Hamid from Al Azhar University. He is the Chairman and member of the Shari’a Supervisory
Hassan Board in many of the Islamic Financial Institutions. In addition, Dr. Hassan is Chairman
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. 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
Dr. Ali Mohuddin the University of Qatar. He sits on the Boards of Shari’a Supervisory Boards for several
Al’Qurra Daghi banks and financial institutions. Dr. Al’Qurra Daghi is also a member of the Islamic Fiqh
Member 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.

16 AL SALAM BANK-BAHRAIN
 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
Shaikh Adnan Abdulla he is also Chairman of Al Sanabil Orphans Protection Society, Chairman of the Board of
Al Qattan Trustees of the Royal Charity Establishment under the Royal Court - Kingdom of Bahrain,
Member 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. 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.
Dr. Mohamed
Abdulhakim Zoeir
Member & Secretary
to the Board

AL SALAM BANK-BAHRAIN 17
“
“The unsung indomitable spirit, the leaf is an individual
miracle - its multifaceted working systems are a wonder to
mankind. This creation of Allah has come down to our day
over thousands of years in the same perfect state with no
alterations.”
 Board of Directors’ Report
to the Shareholders

The Directors of Al-Salam Bank-Bahrain BSC (“the Bank”) have the pleasure in
submitting their report to the shareholders accompanied by the consolidated financial
statements for the year ended 31 December 2010. 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 2010 continued to be very challenging; yet the fourth full year of commercial
operations has been successful.

The Group managed to post an impressive growth in total assets from BD785.9 million
(US$2.1 billion) as at 31 December 2009 to BD 857.4 million (US$ 2.3 billion), an
increase of BD71.5 million (US$189.7 million) or 9% over 31 December 2009.
The growth is largely attributable to growth in the credit portfolio of the Group and
investments. The Group managed to successfully exit one of its European real estate
transactions during 2010 and concluded a new transaction with a better risk profile
and expected returns. However, continuing global economic downturn prevented
other planned exits in the private equity and real estate lines of businesses. Though
the overall net profit for the year 2010 shows a decline over the previous year, on
a normalised basis, without considering the gain that arose on acquisition of the
Subsidiary in 2009, the Group has achieved a growth of 23% in the net profit. While
the gross operating income increased by 40% prudent cost management continued in
2010 with a cost-to-income ratio of 61% for 2010.

Your Bank has started realising the benefits of acquisition of Bahraini Saudi Bank in
2009. In line with the directors’ strategy to focus on expanding its presence in Bahrain,
the Group had opened three more branches in key strategic locations during 2010,
resulting in an expanded network of 11 branches and 22 ATMs. The acquisition of
Bahraini Saudi Bank has assisted your Bank in further enhancing its visibility and
improved the Group’s service delivery capabilities. Your Bank has also been successful
in converting a significant portion of conventional assets and liabilities of BSB to
Shari’a compliant products. Synergies have also been established on technological
and operational aspects and it is expected that this synergy will reflect in all other
aspects within the group that would lead to decrease in costs over the coming years.

At the same time, your Bank continues to look for investment opportunities to achieve
its vision of becoming one of the largest financial institutions in the region through
acquisition and expansion in various financial services sectors.

22 AL SALAM BANK-BAHRAIN
In the small market in which it operates, the Group managed to record an impressive growth of 43% in its
financing portfolio compared to 2009. This primarily includes Murabaha, Mudharaba and Ijara financing.
The Bank was mandated as lead arranger for a syndicated seven year Ijara facility of BD90.5 million (US$
240 million) to a large iconic real estate project in Bahrain and participated in this facility along with other
leading banks in Bahrain. This transaction was the largest finance raising in Bahrain in 2010 amongst the
private sector.

On the investments side, the Bank had successfully exited its investment in Milton Gate, a trophy asset
domiciled in Central London and provided investors an impressive return of 15%. During 2010, the Bank
managed to acquire a stake in Canada Square, a prime commercial real estate property in Canary Wharf,
London with a better credit profile and expected returns. The transaction was concluded in August 2010
and offered to investors. The transaction offers a running cash yield of 9.46% per annum paid quarterly. This
clearly indicates the Bank’s commitment to bring solid transactions to its investors.

In line with regulatory focus on reducing real estate exposure, the Bank had tightened its investment and
financing to real estate sector. In 2010, your Bank had launched two projects, Kenaz Al Bahrain and Tubli
Gardens through its real estate development arm, Manara Developments. These projects are located at key
locations in Bahrain and offer affordable housing at competitive prices. Market responses to the launches were
encouraging which prove that market still exists for development offerings with a product differentiation and
competitive pricing. 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 highly selective
basis to take advantage of market opportunities and bearing in mind investor’s cash yield expectations.

On the treasury front, the Group continues to expand its financial institutions network. In 2010, the Group
continued to be a net lender to the system with a net lending position of BD127 million at 31 December
2010. The Group also enjoys a comfortable liquidity position as reflected by its strong liquidity ratio of 24%
as at 31 December 2010. This is net of due to banks and interbank deposits and excludes Sukuk issued by
Central Bank of Bahrain (CBB). In 2010, as part of its strategy to diversify its financing portfolio and liquidity
management, the Group had invested an additional amount of BD36 million in Sukuk issued by CBB. As
part of its diversification of income stream, the Bank had been an active player in the secondary market and
had invested in high quality Sukuks issued by credit worthy counterparties. This had resulted in the corporate
Sukuk portfolio increasing from BD17 million at end of 2009 to BD62 million at end of 2010. The yields
arising from Sukuk also contributed towards improving Bank’s core income.

The Directors believe that the challenges facing the banking sector could very well continue in 2011 and the
Group is no exception to these challenges.

Financially, fiscal year 2010 has seen a decline in net profit from BD14 million in 2009 to BD7.3 million
in 2010, representing a return on equity of 3.6% (2009:7.6%). The gross operating income amounted to
BD22.4 million (2009: BD15.9 million) and the operating expenses were BD13.6 million (2009: BD9.7
million). The cost-to-income ratio for the year was 60.6% (2009:40.6 %). The earnings per share (EPS) for
the year amounted to 5 fils (2009: 10 fils).

AL SALAM BANK-BAHRAIN 23
 Board of Directors’ Report
to the Shareholders (Continued)

The performance of 2010 has been a result of the Bank’s focus over the last few
years on generation of core income, offering attractive investment opportunities to
investors and prudent cost control measures. The Directors and management will use
these key initiatives along with an existing strong risk management framework and
growing customer base to achieve better results in 2011. This will enable your Bank
to outperform its peers in the medium to long term and position itself as a universal
Islamic bank.

Retained earnings and appropriation of net income:

BD’000
Balance at beginning of the year 5,009
Net profit for the year - 2010 7,209
Transfer to statutory reserve (721)
Transfer to investment reserve (6,794)
Charitable contributions (100)
Balance at end of the year 4,603

24 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 2010.

31/12/2010
Directors' shares 118,528,745
Senior Managers' shares 7,762,749
126,291,494

Directors’ expenses for attendance at Board meetings for 2010 amounted to BD15,989.

2010 % of total
No. of Outstanding
No. of shares Shareholders shares

Percentage of shares held

Less than 0.5% 712,288,319 23,155 47.6
0.5% to less than 1% 241,461,913 22 16.1
1% up to less than 5% 372,279,793 15 24.9
Over 5% 171,033,800 1 11.4
Total 1,497,063,825 23,193 100.00

Nationality Holdings

Shareholders holding over 5%:

Global Mena Macro Fund Company B.S.C. (c) Bahrain 11.4%

In closing, 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 2011.

1 February 2011 Mohamed Ali Rashid Alabbar

Manama, Kingdom of Bahrain Chairman

AL SALAM BANK-BAHRAIN 25
 Message from the
Chief Executive Officer

It gives me great pleasure to report to you that through hard work and dedication,
the Group has continued to post profits in 2010 despite a challenging business
environment. Under the prevailing business environment, the Group’s focus was
to strengthen the balance sheet with selective asset building. As a result, the Group
achieved a 9.1% growth in total assets from BD785.9 million (US$2.1 billion) to
BD857.4 million (US$2.3 billion) through the expansion of the credit portfolio and
investment activities. On the funding side, customer deposits increased by BD73.0
million.

Despite the difficult business conditions, the Group reported a net profit of BD7.32
million for 2010 compared to BD13.96 million in 2009. While there was significant
activity in the investment area, the income generated from such activities in the
current year dropped by 44% to BD10.2 million compared to BD18.3 million in 2009.
The adverse variance is due to market conditions where property transactions are far
and few and real estate exits continue to be challenging. The management exercised
strict expense controls measures and also adhered to prudent spending leading to a
decrease in the overall operating expenses of the Group.

The Group, as the lead arranger, successfully completed a 7-year BD90.5 million
syndicated Ijarah financing facility for Bahrain based Financial Center Development
Company. In 2010, the Group successfully closed a transaction in the heart of the
financial district of London in UK by participating in the mezzanine financing of
a trophy asset in Canary Wharf. The exit from the Milton Gate investment in 2010
provided the investors with an attractive average return of 15% during a period
characterised by scarcity of attractive investment opportunities.

The Group continues to apply conservative banking practices and relies on its core
competencies while adhering to the principles of Shari’a. Prudent risk management
practices are being followed in granting new facilities and acquiring investments. The
Group has followed a tight policy in providing financing and investment in the real
estate sector in line with the regulatory focus to control such exposures. The Group’s
Capital Adequacy Ratio reflected a healthy measure of 24.7% against the mandatory
12% fixed by the Central Bank of Bahrain (CBB). The strong liquidity position at 24%
coupled with our capital base is expected to provide us a competitive advantage.

Overall, 2010 was the first full year of combined operations with Bahraini Saudi
Bank (BSB), which is the retail and corporate banking arm of the Group. Various new
products and services for retail banking customers are being rolled out through BSB.
The integration of conventional activities of BSB into a Shari’a compliant business
was challenging but the conversion of core activities was successfully completed as
result of dedicating the necessary resources. The combined retail banking activity
has increased the focus on reaching our customers, providing them with customized
solutions and delivery channels, represented by a comprehensive network of branches
and ATMs.

26 AL SALAM BANK-BAHRAIN
Aware of its social responsibilities, the Group continues to contribute, both money and in kind, to worthy
causes that fulfill the societal needs of individuals or non-profit charitable organizations.

In closing, I wish to place on record my appreciation of ASBB and BSB staff members who have demonstrated
their dedication, skill and professionalism in discharging their duties. I am also grateful to the Board of
Directors and the Central Bank of Bahrain for their strong support and guidance. Last but certainly not least,
we owe special thanks to our shareholders and clients for their continued support and confidence. As always,
I note my sincere appreciation of the longstanding support to the Government of the Kingdom of Bahrain and
its leadership.

Yousif Abdulla Taqi

Director & Chief Executive Officer

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

Operating Environment
Contrary to our expectations of a better financial year, the market conditions in 2010
continued to be challenging with little or no visible improvement in the global as
well as regional markets. The global economic crisis and the recession that followed
had a significant negative impact on the banking environment in the region. Core
economic sectors like real estate, construction and trading continued to be adversely
affected. GCC economies have seen a higher degree of resilience to the downfall
from the financial crisis as compared to its western counterparts with the exception
of the real estate sector. The region achieved a 4% growth in GDP in 2010 as a result
of the significant government spending that was seen in Saudi Arabia and Qatar on
infrastructure projects.

Real estate development which was largely responsible for fueling the pre-crisis
growth in the region remained stagnant. Execution of new developments was
postponed owing to continued fall in occupancy levels and the new supply that came
online. Availability of credit continues to be challenging as most regional and global
financial institutions are still battling with decreasing asset values. Limited credit was
available at conservative loan to value ratios which require higher development equity
commitments. Most regional financial institutions are focused on restructuring their
balance sheets and consolidating business units in order to save costs in this extremely
challenging operating environment.

Business Environment
The business environment in the relatively smaller market we operate is yet to see a
significant uplift in the demand for new credit. As a result, higher quality commercial
assets have become a sought after commodity within the banking community in
the Kingdom for Islamic as well as conventional financial institutions. The Group is
continuing to focus on the retail sector and is seeing the benefits of acquisition of
Bahraini Saudi Bank in 2009 which is providing the platform to grow the retail banking
business by strengthening our presence through opening new branches in strategic
locations.

Financial Performance
Total assets of the Group grew by 9.2% (2009: 41.7%) to BD 857.3 million (2009:
BD 785.9 million) over the last fiscal year. Operating income of the Group marginally
declined by 7% (2009: a decrease of 36%) to BD 22.3 million (2009: BD 23.9 million)
with income from financing contracts growing by 63.4% over the previous year reflecting
a solid expansion of the loan book. The operating expenses of the Group increased by
39.5% over the previous year, largely due to the consolidation of expenses incurred
by our subsidiary, Bahraini Saudi Bank. Income from investment exits decreased
by 87% over the previous year, reiterating the difficult operating environment that

28 AL SALAM BANK-BAHRAIN
is experienced by most regional financial institutions. In spite of the tough market conditions, the Bank
achieved a net profit of BD 7.3 million for the year fiscal year 2010 (2009: BD 13.9 million).

Capital Adequacy
The Group’s capital adequacy continues to reflect a healthy ratio of 24.70% (2009: 28.6%) as of the end of
the fiscal year against a mandatory requirement of 12% stipulated by the Central Bank of Bahrain under the
new Basel II framework that came into effect in 2008.

Asset Quality
The Group continues to follow a conservative approach in selecting new assets for financing and investments.
More than 90% of the financing assets are grouped under “satisfactory” category and an amount of BD 1.51
million (2009: BD Nil) has been set aside for past due but not impaired facilities although such assets are
covered by adequate collateral. This provision has been made in line with the bank’s conservative risk
management policy.

Funds Under Management

High Net Worth Individuals in the region continued to take a conservative approach towards new investment
commitments. Such an approach and our successful exit form Milton Gate investment resulted in a reduction
in funds under management at the end of the fiscal year which stood at BD 48.13 million (2009: BD 60.7
million). The Group has built a strong relationship with its investors over the short history of the Bank by
demonstrating our professional approach, personalized service and ability to source unique and attractive
investment opportunities.

BANKING GROUP

Corporate Banking
The Group continued its efforts to grow the corporate loan book during the year. As a result of these efforts,
the Group successfully secured the mandate to structure a BD 90.5 million Ijarah financing facility on behalf
of Bahrain based Financial Center Development Company. The transaction was fully subscribed by local and
regional financial institutions.

The Group also continued to extend support to its existing customer base to provide stability through the
ongoing credit squeeze. However, credit quality remained on high priority when new facilities were granted.
The Group remains committed to growth of the local economy with new assets booked to further boost the
economic activity in the Kingdom. The focus in the fiscal year was to target Small and Medium Enterprises
(SME) in the Kingdom. Our corporate banking team meets with customers on a regular basis to assess their
financing needs and identify products which would then be tailored to suit their requirements. Through these
efforts, Corporate Banking achieved improved asset quality and value.

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

Corporate Banking (continued)

The Group was successful in attracting new deposits during the year while retaining
the existing deposits. The deposit base increased by 16% to BD 532.2 million (2009:
BD 459 million).

Retail Banking
As a new business initiative, the Group continued to focus on retail banking sector.
While three new branches were opened during the year, three existing branches were
renovated to maintain the high standard of comfort and convenience offered to our
customers. Six new ATMs were added to our current service points bringing the total
number of ATM’s to 22. These are installed in convenient locations throughout the
Kingdom. The competition in the retail banking space continues to be extremely high.
As the Kingdom continues to be overbanked, the competition among local financial
institutions to attract new deposits and provide new facilities remains a challenge.

Wealth Management
The Group offered attractive products to the wealth management market segment.
Wealth management products are offered to investors through a dedicated placement
team which continues to provide personalized services. The placement and relationship
professionals meet the investors on a regular basis and assess their appetite and risk
profile prior to offering any customized solutions.

Investments
As part of our investment team’s mandate, a large number of opportunities were
subjected to initial review and analysis during the year. These investment opportunities
typically arise from across all continents. These opportunities are subjected to rigorous
internal review and analysis prior to presenting them to the Investment Committee of
the Bank.

The Management follows an extremely cautious approach to investment selection.

During the year, the Bank concluded several debt transactions in the global real estate
market.

As a result of the financial meltdown in 2008 that continued through most of 2009, the
global property markets witnessed a tightening of availability of senior financing. As
the global real estate market crumbled, the risk appetite of financial institutions also
diminished reducing the level of debt available for property acquisitions. The higher
loan-to-value ratios that were prevalent prior to the meltdown disappeared. This
environment presented a new opportunity for mezzanine financiers. The Bank took
advantage of this opportunistic situation to provide £38 million mezzanine financing
to restructure a prime office building in Canary Wharf in UK.

30 AL SALAM BANK-BAHRAIN
The Bank participated in the first Islamic REIT that was listed in the Singapore Stock Exchange as a cornerstone
investor. The investment has enabled the Bank to deploy excess liquidity while providing superior returns
and maintaining liquidity.

In order to support the Kingdom of Bahrain’s initiative to distribute its wealth through public ownership of
national industries, the Bank provided an underwriting commitment towards the retail tranche of the IPO of
Alba that was successfully concluded toward the end of the fiscal year.

Valuation of prime commercial properties in the UK experienced a rapid improvement through the second
half of 2009 and first half of 2010. In order to take advantage of the rapid growth, the Bank exited its equity
investment in Milton Gate which was acquired in 2009. The exit provided our investors with an attractive
return on their investment while demonstrating the Bank’s ability to conclude sale transactions in tough
market conditions.

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 Bank’s investment across diversified asset classes in China has progressed well and had been able to
achieve impressive growth in overall investment values. The underlying investment portfolio of the fund
comprises of significant minority stakes in agricultural business, food, pharmaceutical, logistics, galvanized
steel and industrial machinery. During the year, one of operating companies engaged in an integrated
agribusiness space concluded a successful IPO that was listed on the Singapore Stock Exchange. The
investment has provided a 1.7x return based on the share price as of 31 December 2010. The fund manager
is targeting two IPOs in 2011 as the market for new listings in China are set to improve. The Bank’s initial
investment commitment was USD 40 million.

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.

Information Technology
During 2010, the Group has successfully integrated the core banking platform of its subsidiary, Bahraini
Saudi Bank. Both Al Salam and Bahraini Saudi Bank started working on a single Islamic banking Platform.
The conversion of data from a conventional banking platform to an Islamic banking platform was a challenge
and was executed as a main priority. The other priorities for the Information Technology division during the
year were to enhance customers’ banking experience, upgrade IT Infrastructure to offer more technology
driven solutions and ensure compliance with regulatory as well as internal control requirements.

AL SALAM BANK-BAHRAIN 31
 Management Review of
Operations & Activities (continued)

Corporate Governance and Risk Management

During the year, significant initiatives were undertaken to improve the knowledge
and practice of Corporate Governance within the Bank. Compliance to Central Bank
of Bahrain guidelines and other regulatory guidelines is a fundamental element of
the Group’s strategy. During the year a new application was rolled out for successful
implementation of BASEL II requirements.

Know Your Customer

The Group complies with Financial Crimes Module of Central Bank of Bahrain’s
rule book. The 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.

The Group places significant emphasis in understanding its customers and their
financial activities. The Group has implemented world class systems to support the
monitoring activities. Proper due diligence is conducted to ensure that financial
activities of its customers are performed in accordance with the guidelines issued by
the regulatory authorities.

Human Capital
Human capital is considered a vital asset of the Group and also a key determinant in
the success of the entity. The Bank has a comprehensive Human Resources strategy
with focus on attracting talent, encouraging performance, developing skills, nurturing
leadership skills, and retaining talent. Bahraini employees comprise of 84% (82% in
2009) of the total of 222 employees (233 in 2009) across Singapore and Bahrain.

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
Group. Annual performance reviews are conducted to assess individual performances
where training needs are also identified and facilitated. A less formal semi-annual
appraisal system has been introduced for the benefit of employees where concerns
and suggestions are discussed in an informal environment. The employees across the
Group received over 11,000 hours (2009: 5,380 hours) of formal training through
in-house and externally arranged training programs. As part of social responsibility,
29 Bahraini students from various universities successfully completed their training
program in various departments throughout the summer.

The management maintains an open dialogue with employees to encourage

transparency. Regular employee events including an annual gathering to review the
Group’s performance and discuss future strategy forms part of the social calendar.

32 AL SALAM BANK-BAHRAIN
Workshops are organized to improve efficiency and increase productivity at the workplace. These social
events encourage interaction among employees and foster their relationships outside working hours.

Corporate Social Responsibility

Since inception, the Group has taken initiatives to positively contribute towards the development of the
community. Consistent efforts are made to ensure continued support of the community. The group plays
an active role in assisting local communities to achieve their aspirations and goals. The Group believes in
supporting business needs in a socially responsible manner where resultant benefits will encompass every
individual of the community.

Our vision of a prosperous Bahrain is not restricted to providing banking service alone but to creating an
environment where every member of the community has an opportunity to build a future which is safe,
secure and flourishing. The following are some of the initiatives undertaken by the Group in 2010 towards
achieving this vision:
• Provided financial contribution to support the National Awareness Campaign for Bahrain National
Hereditary Aneamia Society. The Campaign was intended to raise awareness among school children
about hereditary diseases such as Sickle cell and Thalassemia.
• Provided financial assistance to Markh Charity Fund activities to support the social activities for young
children.
• Provided financial assistance to Etihad Al Reef Club to support the sports activities of the club.
• Provided financial assistance to Quran Care Society to support the community activities in the Kingdom.

“ “They exist silently in sunshine or in rain, wriggling in the

wind – dropping to the ground when their time comes,
the leaf is a busy body making carbohydrates that act as
building blocks influencing more plant cells and energy
source for all plant cell processes.”

AL SALAM BANK-BAHRAIN 33
 Corporate Governance

Policy
The Bank aspires to the highest standards of ethical conduct: doing what it says;
reporting results with accuracy and transparency; and maintaining full compliance with
the laws, rules and regulations that govern the Bank’s business.

The Board has adopted a Board of Directors Charter which, together with the Bank’s
Memorandum and Articles of Association and the charters of certain Board committees,
provides the authority and practices for governance of the Bank.

Board of directors
The Board of Directors shall provide central leadership to the Bank, establish its
objectives and develop the strategies that direct the ongoing activities of the Bank to
achieve these objectives. Directors shall determine the future of the Bank; protect its
assets and reputation. They will consider how their decisions relate to “stakeholders”
and the regulatory framework. Directors shall apply skill and care in exercising their
duties to the Bank and are subject to fiduciary duties. Directors shall be accountable
to the shareholders of the Bank for the Bank’s performance and can be removed from
office by them.

The primary responsibility of the Board is to provide effective governance over the
Bank’s affairs for the benefit of its shareholders, and to balance the interests of its diverse
constituencies, including its customers, correspondent, employees, suppliers and local
communities. In all actions taken by the Board, the directors are expected to exercise
their business judgment in what they reasonably believe to be in the best interests of the
Bank. In discharging that obligation, directors may rely on the honesty and professional
integrity of the Bank’s senior executives and its outside advisors and auditors.

34 AL SALAM BANK-BAHRAIN
Board of directors (continued)

Board of Directors
Date & Location of Names of
Board of Directors Directors Who
Committee Participated by Names of Directors not
Meeting Names of Directors Present Phone/video link present
15th February Habib Ahmed Kassem H.E. Mohammed Al Abbar
2010 Shaikha Hessa bint Khalifa Al Khalifa Essam Al Muhadib
Al-Salam Bank Sheikh Abedlelah Moh’d Kaki Ahmed Jamal Jawa
Hamad Al Humaizi
Fahad Sami Al-Ebrahim
Terence D. Allen
Salman Al Mahmeed
Yousif Abdulla Taqi

27th April Habib Ahmed Kassem H.E. Mohammed Al Abbar

2010 Shaikha Hessa bint Khalifa Al Khalifa Essam Al Muhadib
Al-Salam Bank Sheikh Abedlelah Moh’d Kaki
Hamad Al Humaizi
Fahad Sami Al-Ebrahim
Terence D. Allen
Salman Al Mahmeed
Yousif Abdulla Taqi
Ahmed Jamal Jawa

8th July H.E. Mohammed Al Abbar

2010 Essam Al Muhadib
Al-Salam Bank Habib Ahmed Kassem
Shaikha Hessa bint Khalifa Al Khalifa
Sheikh Abedlelah Moh’d Kaki
Decisions on the
Hamad Al Humaizi
statements for Q2
Fahad Sami Al-Ebrahim
2010 were approved
Terence D. Allen
by Board members Salman Al Mahmeed
through circulation Yousif Abdulla Taqi
Ahmed Jamal Jawa

18th October H.E. Mohammed Al Abbar Sheikh Abedlelah Moh’d Kaki

2010 Habib Ahmed Kassem Fahad Sami Al-Ebrahim
Al-Salam Bank Shaikha Hessa bint Khalifa Al Khalifa
Salman Al Mahmeed Essam Al Muhadib
Hamad Al Humaizi
Ahmed Jamal Jawa
Terence D. Allen
Yousif Abdulla Taqi

AL SALAM BANK-BAHRAIN 35
 Corporate Governance (continued)

The Bank is organized as follows:

SHAREHOLDERS

Fatwa and Shari’a

External Auditors 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

Treasury & Financial Markets Finance & Strategic

Development

36 AL SALAM BANK-BAHRAIN
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.

Members:
1. Habib Ahmed Kasim
2. Ahmed Jamal Jawa
3. Fahad Sami Al Ebrahim
4. Essam Al Muhaideb

Executive Committee
Date & Location of Names of Directors Who
Executive Names of Directors Participated Names of Directors not
Committee Meeting Present by Phone/video link present
2nd February 2010 Habib Ahmed Kassem Ahmed Jamal Jawa
Al-Salam Bank Essam Al Muhaideb
Fahad Al Ebrahim

20th April 2010 Habib Ahmed Kassem Ahmed Jamal Jawa

Al-Salam Bank Essam Al Muhaideb
Fahad Al Ebrahim

13th October 2010 Habib Ahmed Kassem Ahmed Jamal Jawa

Al-Salam Bank Essam Al Muhaideb
Fahad Al Ebrahim

AL SALAM BANK-BAHRAIN 37
 Corporate Governance (continued)

BOARD COMMITTEES (continued)

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 the Board and between the regulators and the Board.

Members:
1. Terence D. Allen
2. Hamad Al Humaizi  
3. John Hawkins - independent financial adviser

Audit Committee
Date & Location of Names of Directors Who
Audit Names of Directors Participated Names of Directors not
Committee Meeting Present by Phone/video link present
14th February 2010 Terence Allen
Al-Salam Bank Hamad Al Homaizi

26th April 2010 Terence Allen

Al-Salam Bank Hamad Al Homaizi
John Hawkins

7th July 2010 Terence Allen

Al-Salam Bank Hamad Al Homaizi
John Hawkins

13th October 2010 Terence Allen

Al-Salam Bank Hamad Al Homaizi
John Hawkins

38 AL SALAM BANK-BAHRAIN
BOARD COMMITTEES (continued)

Remuneration Committee
The role is to provide a formal and transparent procedure for developing a compensation policy for the
Chief Executive Officer, the senior management and the rest of the employees; ensures that compensation
offered is competitive, in line with the market/peer group and consistent with the responsibilities assigned
to employees. The Committee approves policies covering hiring, compensation and training. In addition, the
Committee recommends to the Board special compensation plans, including annual performance bonus and
short/long term incentives, to attract, motivate and retain key employees.

Members:
1. Shaikha Hessa bint Khalifa Al Khalifa
2. Habib Ahmed Kassem
3. Fahad Sami Al Ebrahim

Remuneration Committee
Date & Location of Names of Directors Who
Remuneration Names of Directors Participated Names of Directors
Committee Meeting Present by Phone/video link not present
14th January 2010 Shaikha Hessa bint Khalifa Al Khalifa
Al-Salam Bank Habib Ahmed Kassem
Fahad Sami Al-Ebrahim

AL SALAM BANK-BAHRAIN 39
 Corporate Governance (continued)

MANAGEMENT COMMITTEES
The Board delegates the authority for management of the Bank to the Chief Executive Officer. The CEO and
Executive Management are responsible for implementation of decisions and strategies approved by the Board
of Directors and the Fatwa and Shari’a Supervisory Board.

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.

Members:
1. Yousif Abdulla Taqi 4. Ahmed Abdi Sheikh
2. Mukundan Raghavachari 5. Dr. Anwar Al Sadah
3. Nabeel Al Tattan

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

Members:
1. Yousif Abdulla Taqi 4. Nabeel Al Tattan
2. Dr. Anwar Al Sadah 5. Ahmed Abdi Sheikh
3. Mukundan Raghavachari

40 AL SALAM BANK-BAHRAIN
MANAGEMENT COMMITTEES (continued)

Committee Roles and responsibilities

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.

Members:
1. Yousif Abdulla Taqi 5. Byron Askin
2. Dr. Anwar Al Sadah
3. Mukundan Raghavachari
4. Nabeel Al Tattan

Information Technology ITSC oversees the information technology function of the Bank. It recommends
Steering 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.

Members:
1. Mukundan Raghavachari 5. T. R. Venkatesh
2. Ahmed Abdi Sheikh 6. Anwar Murad
3. Karim Turki 7. Rachad El Khawand
4. Essa Bohijji

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 41
 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.

42 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 34 to 41.

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 mitigating 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 43
 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

Compliance &
Credit Risk Market Risk Operational Risk Capital
Anti- Money
Management Management Management Management
Laundering
• Exposures and • Positioning • Control Self • Basel II • Compliance
limits Monitoring and Limits Assessments Compliance Monitoring
Monitoring

• Portfolio • Risk • Key Risk • Risk Adjusted • Anti-money

Management Measurement Indicators Pricing Laundering
Methodology Monitoring control

• Timely Reporting • Timely reporting • Risk & Loss • Reporting to • Training and
to Risk to ALCO Events Database Board Executive Awareness
Committee Committee

• Internal rating • IT Security • Scenario Analysis • AML System

Methodology Managements Controls

• Periodic Stress • Business

Testing and Continuity
Scenario Planning
Analysis
• Outsourcing Risk
Management

COMPLIANCE & ANTI-MONEY LAUNDERING UNIT

The Bank has established an independent and dedicated 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.

44 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.

AL SALAM BANK-BAHRAIN 45
 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.

The human side has never been neglected by the Bank for it believes in human capital
value and development and sharpening the capabilities through the provision of equal
employment opportunities. To this end, Al Salam Bank-Bahrain in cooperation with
Disabled Services Centre recruited a number of citizens of special needs, in a sign of
the importance of integrating people with special needs in the workplace leading them
to contribute to the country’s development and prosperity.

The Bank also spent BD122,000 as sponsorships and donations for the treatment of a
number of patients, and for assisting a number of needy Bahraini families.

Al Salam Bank adopts a policy that supports training and employment. Bahrainis
accounted for 84% of all employees at the end of 2010. Also in 2010, the Bank carried
out its Summer Internship Program, for the fourth consecutive year, with more than 20
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. Such organizations included the
Bahrain National Hereditary Aneamia Society, the Bahraini Blind Friendship Society,
the Quran Care Society, the Markh Charity Fund and the Etihad Al-Reef Club.

46 AL SALAM BANK-BAHRAIN
“
“The veins in the leaf may look alike
but each vein is different in nature
programmed to perform complex functions
that constantly adds value and energy to
the tree and the surroundings.”
 Fatwa & Shari’a Supervisory
Board Report to the Shareholders
for the Financial Year Ended 31 December 2010

The Shari’a Supervisory Board (“the Board”) has reviewed the transactions entered
into by the Bank during the year. The Board reviewed the balance sheet, the income
statement, the statement of cash flows and the statement of changes in equity. The
Board met and discussed the financial statements with the management of the Bank
and presented its annual report as follows:

First:
1. The Board has supervised the Bank’s activities and transactions during the year.
The Board had played its role in guiding various departments to adherence to the
Principles of Shari’a and the pronouncements of the Board in respect of 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 Pronouncements
of the 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 of these transactions, and issued
appropriate Fatwas and Pronouncements. These decisions have been circulated to the
departments concerned for execution.

Second:
The Board has reviewed samples of contracts and agreements that were presented to it
and requested management to abide by these sample contracts and agreements.

Third: Financial Statements:

The Board has reviewed the consolidated financial statements of the Group (the Bank
and its subsidiary) and the notes thereto and clarifications complementary to them, on
which the Board made the following observations and recommendations:

1. Based on information made available by the Banks’ management, the consolidated

financial statements reviewed by the Board presents fairly the Banks’ assets, its liabilities,
URIA, equity, revenues and operating expenses. The accuracy of the information and
data provided are the responsibility of the Bank’s management.

2. The Banks’ management represents that majority of the deposits are based on
Wakala contracts; the clients are informed of the profit to expect and the Bank holds
one general pool for these deposits. The management represents that the Bank receives
limited amounts of saving accounts 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 deposits to include accepting
fixed-term deposits on Mudaraba basis in line with the practice in other Islamic Banks.

48 AL SALAM BANK-BAHRAIN
The Board believes that the consolidated balance sheet, 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 does not require the Bank to pay Zakah on behalf of the
shareholders, the Board has calculated the Zakah payable by shareholders. This has been disclosed in the
notes to financial statements for shareholders information.

Fifth: Conversion of Bahraini Saudi Bank:

The Bank has acquired a 90.31% stake in Bahraini Saudi Bank with the objective of converting it to an
Islamic Bank. The conversion is underway and the Board has advised that 30 June 2011 is the last day of
conversion, so that the bank may start all its activities on 01 July 2011 in accordance with Shari’a principles
and Rules only.

Sixth: Shari’a Prohibited Income:

Pursuant to the Board’s directive, the prohibited income earned by the Subsidiary should be purified by the
Group from the date of conversion. Since the Subsidiary’s operations are not fully compliant with Shari’a
rules and Principles, the prohibited income and expenses have been calculated and disclosed in the notes
to the financial statements. The shareholders should purify the amount of prohibited income attributable to
each share by donating the relevant amounts of such prohibited income to charity.

The prohibited income to be donated by each shareholder for 2010 has been determined by the Shari’a
Supervisory Board as 2.06 fils per share.

The Board hereby emphasizes that management has the primary responsibility to comply with the Rules
and Principles of Shari’a in all activities and transactions of the Bank. The Board confirms that the executed
transactions that are submitted by management of the Bank for the Board’s review during the year were
generally in compliance with Rules and Principles of Shari’a. The management has shown utmost interest
and willingness to fully comply with the recommendations of the Board.

Dr. Hussein Hamed Hassan Dr. Ali Al Qura Daghi

Chairman Board Member

Dr. Mohammed Zoeir Shaikh Adnan Al Qattan

Member & Secretary to the Board Board Member

AL SALAM BANK-BAHRAIN 49
 P.O Box 140
14th Floor - The Tower
Bahrain Commercial Complex
Manama, Kingdom of Bahrain
Tel: +973 1753 5455 Fax: +973 1753 5405
manama@[Link]
[Link]/me
C.R. No. 6700

Independent Auditors’ Report to the Shareholders of

Al Salam Bank-Bahrain B.S.C.

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 2010, 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 Bank’s Board of Directors. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit.

Auditors’ Responsibility
We conducted our audit in accordance with Auditing Standards for Islamic Financial Institutions issued by the
Accounting and Auditing Organisation for Islamic Financial Institutions [“AAOIFI”]. 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 includes examining, on a test basis, evidence supporting the amounts
and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by Board of Directors, as well as evaluating the overall financial statements
presentation. We believe that our audit provides a reasonable basis for our 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 2010, 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 AAOIFI.

Other 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 Bank, have occurred during the year ended 31 December
2010 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 license and has also complied with the
Islamic Shari’a Rules and Principles as determined by the Shari’a Supervisory Board of the Bank.

1 February 2011
Manama, Kingdom of Bahrain

A member firm of Ernst & Young Global Limited

50 AL SALAM BANK-BAHRAIN
Consolidated Statement
of Financial Position
31 December 2010

31 December 31 December
2010 2009
Note BD ‘000 BD ‘000
ASSETS
Cash and balances with banks and
Central Bank of Bahrain 5 95,791 126,739
Central Bank of Bahrain Sukuk 68,632 32,908
Murabaha receivables from banks 6 137,299 149,304
Corporate Sukuk 61,724 16,950
Murabaha and Mudaraba financing 7 120,812 87,274
Ijarah Muntahia Bittamleek 8 69,825 46,315
Musharaka financing 8,127 5,384
Assets under conversion 9 57,432 98,305
Non-trading investments 10 212,432 184,680
Investment in an associate 11 7,578 7,659
Investment properties 3,373 1,177
Receivables and prepayments 12 12,479 26,902
Premises and equipment 1,859 2,337

TOTAL ASSETS 857,363 785,934

LIABILITIES, UNRESTRICTED INVESTMENT

ACCOUNTS AND EQUITY

LIABILITIES
Murabaha and Wakala payables to banks 101,300 89,398
Wakala from non-banks 456,447 317,370
Customers’ current accounts 57,362 32,700
Liabilities under conversion 9 5,171 120,402
Other liabilities 13 15,993 14,877
TOTAL LIABILITIES 636,273 574,747
UNRESTRICTED INVESTMENT ACCOUNTS 14 18,465 9,409

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

AL SALAM BANK-BAHRAIN 51
 Consolidated Statement
of Financial Position (continued)
Year ended 31 December 2010

31 December 31 December
2010 2009
Note BD ‘000 BD ‘000

EQUITY
Share capital 15 149,706 142,577
Reserves and retained earnings 15 48,922 41,356
Proposed appropriations 15 - 14,258

Total equity attributable to

198,628 198,191
shareholders of the bank

Non-controlling interest 3,997 3,587

TOTAL EQUITY 202,625 201,778

TOTAL LIABILITIES, UNRESTRICTED

857,363 785,934
INVESTMENT ACCOUNTS AND EQUITY

These consolidated financial statements have been authorised for issue in accordance with a resolution of
the Board of Directors dated 1 February 2011.

Mohamed Ali Rashid Alabbar Yousif Taqi

Chairman Director & Chief Executive Officer

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

52 AL SALAM BANK-BAHRAIN
Consolidated
Income Statement
Year ended 31 December 2010

31 December 31 December
2010 2009
Note BD ‘000 BD ‘000
OPERATING INCOME
Income from financing contracts 26,135 15,998
Income from investments designated as
fair value through profit or loss 1,089 713
Gains on disposal of investments 1,531 11,782
Gains on investments designated as
fair value through profit or loss 7,608 5,772
Fees and commissions 16 2,145 556
Foreign exchange gains 839 337
Other income 2,954 18
42,301 35,176
Profit on Murabaha and Wakala payables to banks (617) (1,119)
Profit on Wakala from non-banks (14,674) (13,928)
Profit on unrestricted investment accounts (216) (155)
Depreciation on Ijarah Muntahia Bittamleek 8 (4,430) (4,038)
Total operating income 22,364 15,936

OPERATING EXPENSES
Staff costs 7,023 5,131
Premises and equipment cost 1,144 723
Depreciation 1,133 1,010
Other operating expenses 4,255 2,853
Total operating expenses 13,555 9,717
PROFIT BEFORE RESULTS OF ASSOCIATE / SUBSIDIARY 8,809 6,219
Gain arising on acquisition of a subsidiary - 7,996
Share of gain (loss) from an associate 11 15 (255)
Post acquisition profit from the subsidiary - 21
Shari'a prohibited income contributed to charity - (19)

NET PROFIT BEFORE PROVISIONS 8,824 13,962

Provision for impairment 7 (1,508) -

NET PROFIT FOR THE YEAR 7,316 13,962
Attributable to:
Equity holders of the Bank 7,209 13,960
Non-controlling interest 107 2

7,316 13,962

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 1,497,063,825 1,360,825,581

BASIC AND DILUTED EARNINGS PER SHARE (FILS) 5 10

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

AL SALAM BANK-BAHRAIN 53
 Consolidated Statement of
Comprehensive Income
Year ended 31 December 2010

31 December 31 December
2010 2009
BD ‘000 BD ‘000

NET PROFIT FOR THE YEAR 7,316 13,962

Other comprehensive income:

Net change in fair value 856 (367)
Exchange differences on investment in an associate (96) (99)
Other comprehensive income (loss) for the year 760 (466)

TOTAL COMPREHENSIVE INCOME FOR THE YEAR 8,076 13,496

Attributable to:
Equity holders of the Bank 7,666 13,480
Non-controlling interest 410 16

8,076 13,496

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

54 AL SALAM BANK-BAHRAIN
Consolidated Statement
of Cash Flows
Year ended 31 December 2010

31 December 31 December
2010 2009
BD ‘000 BD ‘000

OPERATING ACTIVITIES
Net profit for the year 7,316 13,962
Adjustments:
Depreciation 1,133 1,010
Gains on investments designated as fair value through profit or loss (7,608) (5,772)
Provision for impairment 1,508 -
Share of (gain)/loss from an associate (15) 255

Operating income before changes in operating assets and liabilities 2,334 9,455

Changes in operating assets and liabilities:

Mandatory reserve with Central Bank of Bahrain (1,600) (4,486)
Central Bank of Bahrain Sukuk (35,724) (1,813)
Murabaha receivables from banks with original maturities
(10,888) 1,497
of 90 days or more
Corporate Sukuk (43,579) (17,457)
Murabaha and Mudaraba financing (35,046) (14,790)
Ijarah Muntahia Bittamleek (23,510) (4,784)
Musharaka financing (2,743) (5,384)
Assets under conversion 41,304 9,030
Non-trading investments, net (20,914) (1,208)
Receivables and prepayments 14,423 (12,473)
Assets held-for-sale - 28,164
Murabaha and Wakala payables to banks 11,902 56,517
Wakala from non-banks 119,130 28,365
Customers' current accounts 24,662 (10,286)
Liabilities under conversion (95,284) (6,262)
Other liabilities 1,016 (460)

Net cash (used in) from operating activities (54,517) 53,625

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

AL SALAM BANK-BAHRAIN 55
 Consolidated Statement
of Cash Flows (continued)
Year ended 31 December 2010

31 December 31 December
2010 2009
BD ‘000 BD ‘000
INVESTING ACTIVITIES
Cash flow arising on acquisition of a subsidiary - 58,092
Purchase of premises and equipment (655) (265)
Purchase of investment property (2,196) -
Net cash (used in) from investing activities (2,851) 57,827

FINANCING ACTIVITIES
Unrestricted investment accounts 9,056 3,039
Share issue expenses - (136)
Dividends (7,129) (12,000)
Net movement in non-controlling interests - (2)

Net cash from (used in) financing activities 1,927 (9,099)

NET CHANGE IN CASH AND CASH EQUIVALENTS (55,441) 102,353

Cash and cash equivalents at 1 January 258,557 156,204

CASH AND CASH EQUIVALENTS AT 31 DECEMBER 203,116 258,557

Cash and cash equivalents comprise of:

Cash and other balances with Central Bank of Bahrain 73,945 104,616
Balances with other banks (Note 5) 2,879 4,756
Murabaha receivables from banks with
original maturities of less than 90 days 126,292 149,185
203,116 258,557

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

56 AL SALAM BANK-BAHRAIN
 Consolidated Statement of Changes In Equity
Year ended 31 December 2010
Attributable to equity holders of the Bank Amounts in
BD ‘000
Foreign
Changes exchange Share Non-
Share Statutory Retained Investment in fair translation premium Total Proposed controlling Total
capital reserve earnings reserve value reserve reserve reserves propriations Total interest equity

Balance as of 1 January 2009 120,000 6,514 12,575 20,473 - 99 - 39,661 12,823 172,484 - 172,484

Non-controlling interest arising on

acquisition of a subsidiary (Note 3) - - - - - - - - - - 3,571 3,571
Total comprehensive income:
Net profit for the year - - 13,960 - - - - 13,960 - 13,960 2 13,962
Other Comprehensive income (loss):
Net change in fair value - - - - (381) - - (381) - (381) 14 (367)
Changes on investment in an associate - - - - - (99) - (99) - (99) - (99)

Total comprehensive income (loss) - - 13,960 - (381) (99) - 13,480 - 13,480 16 13,496
120,000 6,514 26,535 20,473 (381) - - 53,141 12,823 185,964 3,587 189,551
Transfer to investment reserve - - (5,772) 5,772 - - - - - - - -
Transfer to statutory reserve - 1,396 (1,396) - - - - - - - - -
Zakah paid - - - - - - - - (823) (823) - (823)
Charitable donations - - (100) - - - - (100) - (100) - (100)
Dividends paid for 2008 - - - - - - - - (12,000) (12,000) - (12,000)
Proposed dividends for 2009 - - (14,258) - - - - (14,258) 14,258 - - -
Shares issued (Notes 3 and 15.1) 22,577 - - - - - 2,709 2,709 - 25,286 - 25,286
Share issue expenses - - - - - - (136) (136) - (136) - (136)

Balance at 31 December 2009 142,577 7,910 5,009 26,245 (381) - 2,573 41,356 14,258 198,191 3,587 201,778

Total comprehensive income:

Net profit for the year - - 7,209 - - - - 7,209 - 7,209 107 7,316
Other Comprehensive income (loss):
Net change in fair value - - - - 553 - - 553 - 553 303 856
Changes on investment in an associate - - - - - (96) - (96) - (96) - (96)

Total comprehensive income (loss) - - 7,209 - 553 (96) - 7,666 - 7,666 410 8,076
142,577 7,910 12,218 26,245 172 (96) 2,573 49,022 14,258 205,857 3,997 209,854
Transfer to investment reserve - - (6,794) 6,794 - - - - - - - -
Bonus shares issued 7,129 - - - - - - - (7,129) - - -
Transfer to statutory reserve - 721 (721) - - - - - - - - -
Charitable donations - - (100) - - - - (100) - (100) - (100)
Dividends paid for 2009 - - - - - - - - (7,129) (7,129) - (7,129)

Balance at 31 December 2010 149,706 8,631 4,603 33,039 172 (96) 2,573 48,922 - 198,628 3,997 202,625

AL SALAM BANK-BAHRAIN
57
The attached notes 1 to 30 form part of these consolidated financial statements.
 Notes to the Consolidated
Financial Statements
31 December 2010

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.

In 2009, 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 fully compliant Islamic operations is in progress.

The Bank and its subsidiary BSB (together known as “the Group”) operate through
eleven 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
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. The Bank’s
ordinary shares are listed in the Bahrain Stock Exchange.

2 SIGNIFICANT 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 which are held at fair value. These consolidated financial statements
incorporate all assets, liabilities and off balance sheet financial instruments held by the
Group. Investment in an associate, Al Salam Bank-Algeria is equity accounted as per
Financial Accounting Standard (FAS) 24, Investment in Associates (Note 11).

These consolidated financial statements are presented in Bahraini dinars, being the
functional and presentation currency of the Group, rounded to the nearest thousand
[BD ‘000], except where otherwise indicated.

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. For matters for which no AAOIFI standards exist, the Group uses the
relevant International Financial Reporting Standard.

58 AL SALAM BANK-BAHRAIN
2 SIGNIFICANT 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 2010. 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.

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:

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.
AL SALAM BANK-BAHRAIN 59
 Notes to the Consolidated
Financial Statements (continued)
31 December 2010

2 ACCOUNTING POLICIES (continued)

2.2 SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES (continued)

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.

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 significant accounting policies applied in the preparation of these consolidated

financial statements, which are consistent with those of prior year [except for items
disclosed in note 2.3 (ad)] 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.

60 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 initially recorded at fair value, being
the consideration given and subsequently 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 financing
These mainly consist of deferred sales transactions and stated net of deferred profits, provision for impairment,
if any, and amounts settled.

d) Mudaraba financing
These are stated at fair value of consideration given net of provision for impairment, if any, and amounts
settled.

e) 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
shorter of either period of the lease or economic life of the asset.

f) 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.

g) 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, if any.

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

Liabilities under conversion:

These are remeasured at amortised cost.

h) 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 or loss is charged to consolidated income statement.

AL SALAM BANK-BAHRAIN 61
 Notes to the Consolidated
Financial Statements (continued)
31 December 2010

2 ACCOUNTING POLICIES (continued)

2.3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Non-trading investments (continued)

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

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 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 “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 consolidated statement
of financial position 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.

i) 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.

j) 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 FAS 24, 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.

62 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.

k) 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.

l) 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 63
 Notes to the Consolidated
Financial Statements (continued)
31 December 2010

2 ACCOUNTING POLICIES (continued)

2.3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

m) Subsidiaries acquired with a view to sell

A subsidiary acquired with a view to subsequent disposal within 12 months is classified
as “held-for-sale” when the sale is highly probable. Related assets and liabilities of the
subsidiary are shown separately on the consolidated statement of financial position 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.

n) 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 (negative goodwill) 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.

o) Impairment and uncollectability of financial assets

An assessment is made at each reporting 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.

64 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.

p) 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 religious or 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.

q) 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.

r) 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.

s) 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 rate of return of
the respective type of sukuk. Recognition of income is suspended when the Group believes that the recovery of
these amounts may be doubtful or normally when the payments are overdue by 90 days, whichever is earlier.

AL SALAM BANK-BAHRAIN 65
 Notes to the Consolidated
Financial Statements (continued)
31 December 2010

2 ACCOUNTING POLICIES (continued)

2.3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

s) 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 reporting 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.

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

2.3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

s) 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.

t) 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 consolidated 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.

u) Trade and settlement date accounting

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

v) Derecognition of financial assets

Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired
or where the Group has transferred substantially all risk and rewards of ownership.

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 pay.

w) 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.

x) 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.

AL SALAM BANK-BAHRAIN 67
 Notes to the Consolidated
Financial Statements (continued)
31 December 2010

2 ACCOUNTING POLICIES (continued)

2.3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

y) 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 reporting date are included in the equity and are disclosed as an
event after the balance sheet date.

z) Unrestricted investment accounts (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.

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

ab) Cash and cash equivalents

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

ac) Going concern

The Group has made an assessment of the Group’s ability to continue on a going
concern and is satisfied that the Group has the resources to continue in business for
the foreseeable future. Furthermore, the management is not aware of any material
uncertainties that may cast significant doubt upon the Group’s ability to continue as
a going concern. Therefore, the consolidated financial statements continue to be
prepared on the going concern basis.

ad) Adoption of new and amended standards

Financial Accounting Standard No. 23 - Consolidation
FAS 23 sets out the principles for determining entities that are subject to be included
in the consolidated financial statements of a parent and prescribes the accounting for
investment in subsidiaries by parent.

Financial Accounting Standard No. 24 - Associates

FAS 24 sets out the accounting principles for recognising, measuring, presenting and
disclosing the investments in associate.

The requirements of FAS 23 and FAS 24 are largely in line with the current policies
followed by the Group for accounting of subsidiaries and associates and the adoption
of these standards does not have any material impact on the consolidated financial
statements.

ae) Wakala
The Group accepts deposits from customers under Wakala arrangement under which
a return may be payable to customers. There is no restriction on the Group for the use
of funds received under wakala agreement.

68 AL SALAM BANK-BAHRAIN
3 BUSINESS COMBINATION

During 2009, 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 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 new shares of the
Bank (Note 15.1). On 28 October 2009, the Board of BSB was reconstituted with three out of the five Board
members of BSB representing the Bank gaining effective control over BSB.

4 CLASSIFICATION OF FINANCIAL INSTRUMENTS BY MEASUREMENT BASIS

As at 31 December 2010, financial instruments have been classified as follows:

Financial
assets at fair Financial
value through Available for assets at cost /
profit or loss sale amortised cost Total
BD ‘000 BD ‘000 BD ‘000 BD ‘000
ASSETS
Cash and balances with
- - 95,791 95,791
Central Bank of Bahrain
Central Bank of Bahrain Sukuk - - 68,632 68,632
Murabaha receivables from banks - - 137,299 137,299
Corporate Sukuk - 61,724 - 61,724
Murabaha and Mudaraba receivables - - 120,812 120,812
Ijarah Muntahia Bittamleek - - 69,825 69,825
Musharaka financing - - 8,127 8,127
Assets under conversion - 8,803 48,629 57,432
Non-trading investments 199,335 13,097 - 212,432
Receivables - - 11,762 11,762

199,335 83,624 560,877 843,836

AL SALAM BANK-BAHRAIN 69
 Notes to the Consolidated
Financial Statements (continued)
31 December 2010

4 CLASSIFICATION OF FINANCIAL INSTRUMENTS BY MEASUREMENT BASIS

(continued)

(Table continued)
Financial
liabilities at fair Financial
value through Available for liabilities at
profit or loss sale amortised cost Total
BD ‘000 BD ‘000 BD ‘000 BD ‘000
LIABILITIES AND UNRESTRICTED
INVESTMENT ACCOUNTS
Murabaha and Wakala payables to banks - - 101,300 101,300
Wakala from non-banks - - 456,447 456,447
Customers’ current accounts - - 57,362 57,362
Liabilities under conversion - - 5,171 5,171
Other Financial liabilities - - 12,697 12,697
Unrestricted investment accounts - - 18,465 18,465

- - 651,442 651,442

As at 31 December 2009, financial instruments have been classified as follows:

Financial
assets at fair Financial
value through Available for assets at cost /
profit or loss sale amortised cost Total
BD ‘000 BD ‘000 BD ‘000 BD ‘000
ASSETS
Cash and balances with
Central Bank of Bahrain - - 126,739 126,739
Central Bank of Bahrain Sukuk - - 32,908 32,908
Murabaha receivables from banks - - 149,304 149,304
Corporate Sukuk - 16,950 - 16,950
Murabaha and Mudaraba financing - - 87,274 87,274
Ijarah Muntahia Bittamleek - - 46,315 46,315
Musharaka financing - - 5,384 5,384
Assets under conversion - 27,696 70,609 98,305
Non-trading investments 184,680 - - 184,680
Receivables - - 26,214 26,214
184,680 44,646 544,747 774,073

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

(Table continued)
Financial
assets at fair Financial
value through Available for assets at cost /
profit or loss sale amortised cost Total
BD ‘000 BD ‘000 BD ‘000 BD ‘000
LIABILITIES AND UNRESTRICTED
INVESTMENT ACCOUNTS
Murabaha and Wakala payables to banks - - 89,398 89,398
Wakala from non-banks - - 317,370 317,370
Customers' current accounts - - 32,700 32,700
Liabilities under conversion - - 120,402 120,402
Other financial liabilities - - 9,824 9,824
Unrestricted Investment Accounts - - 9,409 9,409

- - 579,103 579,103

5 CASH AND BALANCES WITH CENTRAL BANK OF BAHRAIN

2010 2009
BD ‘000 BD ‘000

Mandatory reserve with Central Bank of Bahrain 18,967 17,367

Cash and other balances with Central Bank of Bahrain 73,945 104,616
Balances with other banks 2,879 4,756

95,791 126,739

6 MURABAHA RECEIVABLES FROM BANKS

Up to Up to
3 months 3 months
2010 2009
BD ‘000 BD ‘000

GCC 137,299 149,304

137,299 149,304

This includes certain Wakala receivables for investment in commodity Murabaha. Deferred profits on
Murabaha receivables from banks amounted to BD 107,000 (2009: BD 58,000).

AL SALAM BANK-BAHRAIN 71
 Notes to the Consolidated
Financial Statements (continued)
31 December 2010

7 MURABAHA AND MUDARABA FINANCING

2010 2009
BD ‘000 BD ‘000

Murabaha financing - gross 116,080 87,274

Less: Provision for impairment (1,508) -
Murabaha financing - net 114,572 87,274
Mudaraba financing 6,240 -

Total Murabaha and Mudaraba financing 120,812 87,274

Murabaha financing are shown net of deferred profits of BD 23,480,000 (2009: BD 9,665,000).

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 documentations provide that the lessor undertakes to
transfer the leased assets to the lessee at the end of the lease term upon the lessee fulfilling all its obligations
under the lease agreement.

2010 2009
BD ‘000 BD ‘000
Movements in Ijarah Muntahia Bittamleek assets are as follows:

At 1 January 46,315 41,531

Additions during the year - net 27,940 8,822
Ijarah assets depreciation - net (4,430) (4,038)

At 31 December 69,825 46,315

2010 2009
BD ‘000 BD ‘000
The future minimum lease receivable in aggregate are as follows:

Due within one year 18,860 17,184

Due in one to five years 36,409 22,179
Due after five years 14,556 6,952

69,825 46,315

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

2010 2009
BD ‘000 BD ‘000
Ijarah Muntahia Bittamleek are divided into the following asset classes:
Aviation 3,114 3,596
Machinery 3,555 3,973
Land and buildings 63,156 38,746
69,825 46,315

The accumulated depreciation on assets subject to Ijarah Muntahia Bittamleek amounted to BD4,402,000
(2009:BD4,863,000).

9 ASSETS AND LIABILITIES UNDER CONVERSION

These represent interest bearing assets and liabilities of BSB, a majority owned subsidiary of the Bank. At
the consolidated statement of financial position date, the conversion of the subsidiary into a fully Islamic
compliant operations is in progress, 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:

2010 2009
BD ‘000 BD ‘000
Assets
Due from banks and financial institutions 757 6,839
Loans and advances to customers 47,872 63,770
Non-trading investments 8,803 27,696

57,432 98,305

Liabilities
Due to banks and financial institutions 5,171 20,912
Customers’ deposits - 99,490

5,171 120,402

Loans and advances, included under assets under conversion above, are stated net of write down of BD
3,983,000 made by the Group against assets held by the Subsidiary at the time of acquisition. This write down
comprise of BD 2,133,000 of specific adjustments against identified facilities and a general write down
of BD 1,850,000 as fair value adjustments as required by IFRS 3, Business Combinations. The Subsidiary
carries these assets at amortized cost, less impairment, as per its accounting policy for Loans and Receivables
Originated by an enterprise. Included in the non-trading investments are certain investments against which
the Group has taken a fair value write down amounting to BD330,000.

AL SALAM BANK-BAHRAIN 73
 Notes to the Consolidated
Financial Statements (continued)
31 December 2010

9 ASSETS AND LIABILITIES UNDER CONVERSION (continued)

Income from financing contracts includes BD 4,963,000 arising from assets under conversion. Profit on
Wakala from non-banks includes BD 1,557,000 arising from liabilities under conversion.

In addition to the above assets under conversion, the subsidiary has a conventional deposit of BD 14,655,000
with the Central Bank of Bahrain.

10 NON-TRADING INVESTMENTS
2010 2009
BD ‘000 BD ‘000

Quoted
- Available for sale 13,097 -
- Fair value through profit or loss 3,212 4,342
Unquoted based on valuation techniques:
- Fair value through profit or loss
Market observable input 149,683 133,402
Non-market observable input 46,440 46,936
212,432 184,680

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), an unlisted bank incorporated
in Algeria. The following table illustrates the summarised financial information of the Group’s investment
in ASBA:
2010 2009
BD ‘000 BD ‘000
Associate’s statement of financial position:
Total assets 86,405 69,692
Total liabilities 38,792 20,318

Net assets 47,613 49,374

Total revenue 1,787 1,077

Total expenses 1,685 2,842

Net gain/(loss) for the year 102 (1,765)

Group’s share of associate’s gain/(loss) 15 (255)

74 AL SALAM BANK-BAHRAIN
12 RECEIVABLES AND PREPAYMENTS

2010 2009
BD ‘000 BD ‘000

Profit receivable on Murabaha and Mudaraba 1,807 1,251

Rental receivable on Ijarah Muntahia Bittamleek assets 683 1,314
Profit receivable on Sukuk 650 263
Prepayments 716 688
Other receivables 8,623 23,386

12,479 26,902

At 31 December 2009, the other receivables included BD 17,892,000 relating to sale of investments and
majority of which was received during 2010.

13 OTHER LIABILITIES

2010 2009
BD ‘000 BD ‘000

Profit payable 4,626 3,198

Accounts payable and accruals 7,029 7,083
Dividends payable 3,440 3,805
End of service benefits 669 599
Charity payable 229 192
15,993 14,877

Charity payable includes BD 8,000 (2009: BD 75,000) of Shari’a prohibited income allocated for
charitable purposes.

14 UNRESTRICTED INVESTMENT ACCOUNTS

Unrestricted investment account holders’ funds are commingled with the Group’s funds and used to fund /
invest in Islamic modes of finance and no priority is granted to any party for the purpose of investments and
distribution of profits. According to the terms of acceptance of the unrestricted investment accounts, 100% of
the funds are invested taking into consideration the relevant weightage, if any. The Mudarib’s share of profit
ranges between 40% and 50%. Operating expenses are charged to shareholders’ funds and not included in
the calculation.

AL SALAM BANK-BAHRAIN 75
 Notes to the Consolidated
Financial Statements (continued)
31 December 2010

14 UNRESTRICTED INVESTMENT ACCOUNTS (continued)

The return on joint invested assets and distribution to unrestricted investment account holders were as follows:

2010 2009
BD ‘000 BD ‘000

Gross return from commingled assets 393 307

Group's share as Mudarib (177) (152)
Distributions to unrestricted investment account holders 216 155

The average profit rate for the URIA holders is 1.00% (2009: 1.25%).

15 EQUITY
2010 2009
BD ‘000 BD ‘000
15.1 SHARE CAPITAL
Authorised:
2,000,000,000 ordinary shares of BD 0.100 each 200,000 200,000

Issued and fully paid (at BD 0.100 per share):

Balance at beginning - 1,425,775,075 (2009:1,200,000,000) shares 142,577 120,000

Issued during the year - 71,288,750 (2009: 225,775,075) shares 7,129 22,577

149,706 142,577

Pursuant to a shareholders’ resolution, during the year the Bank issued one bonus share for every twenty
shares held. This amounted to 5% of the paid up capital resulting in an utilization of BD 7,129,000 from
the retained earnings to this effect. During 2009, pursuant to a shareholders’ resolution, the Bank raised its
authorised capital from BD 120 million to BD 200 million and issued 225,775,075 ordinary shares of the
Bank to those shareholders of BSB who accepted the offer (note 3). At the offer closing date, the market price
of the Bank’s shares was BD 0.112 each. This resulted in proceeds of BD 25,287,000 from the new issue,
including a share premium of BD 0.012 per share aggregating to BD 2,709,000.

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.

76 AL SALAM BANK-BAHRAIN
15 EQUITY (continued)

15.3 INVESTMENT RESERVE

During the year the net unrealized gain of BD 6,794,000 (2009: BD 5,772,000) 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.

16 FEES AND COMMISSIONS

2010 2009
BD ‘000 BD ‘000
Financing and transaction related fees and commissions 1,269 284
Fiduciary and other fees 876 272
2,145 556

17 RELATED PARTY TRANSACTIONS

Related parties comprise major shareholders, directors of the Group, senior management, 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 2010 were as follows:

2010
Associates and Directors and Senior
joint ventures related entities management Total
BD ‘000 BD ‘000 BD ‘000 BD ‘000
Assets:
Murabaha and Mudaraba financing 21,653 54 37 21,744
Ijarah Muntahia Bittamleek 15,068 3,114 175 18,357
Musharaka financing 7,830 - 89 7,919
Assets under conversion - - 21 21
Receivables and prepayments 3,260 8 6 3,274

Liabilities and URIA:

Wakala from non-banks 3,451 1,297 125 4,873
Customers’ current accounts 7,428 161 333 7,922
Unrestricted investment accounts 35 91 1,292 1,418

Commitments 4,310 - - 4,310

Contingent liabilities 1,549 63 - 1,612

AL SALAM BANK-BAHRAIN 77
 Notes to the Consolidated
Financial Statements (continued)
31 December 2010

17 RELATED PARTY TRANSACTIONS (continued)

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

2010
Associates and Directors and Senior
joint ventures related entities management Total
BD ‘000 BD ‘000 BD ‘000 BD ‘000
Income:
Income from Islamic financing contracts 2,945 150 17 3,112

Expenses:
Profit paid on Wakala from non-banks 118 54 43 215
Share of profits on unrestricted
investment accounts 3 1 1 5

2009
Associates and Directors and Senior
joint ventures related entities management Total
BD ‘000 BD ‘000 BD ‘000 BD ‘000
Assets:
Murabaha and Mudaraba financing 9,540 28 67 9,635
Ijarah Muntahia Bittamleek 14,098 3,596 178 17,872
Musharaka financing 5,234 - 99 5,333
Assets under conversion - - 27 27
Receivables and prepayments 2,734 9 15 2,758

Liabilities and URIA:

Wakala from non-banks 15,593 511 312 16,416
Customers' current accounts 7,012 257 35 7,304
Liabilities under conversion - - 1,017 1,017
Unrestricted investment accounts 116 65 62 243

Commitments 4,624 - - 4,624

Contingent liabilities 11,402 56 - 11,458

78 AL SALAM BANK-BAHRAIN
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 Directors and Senior
and joint related entities management Total
ventures
BD ‘000 BD ‘000 BD ‘000 BD ‘000
Income:
Income from other Islamic financing contracts 2,242 93 10 2,345

Expenses:
Profit paid on Wakala from non-banks 281 34 14 329
Share of profits on unrestricted
investment accounts - 1 1 2

As of 31 December 2010, Murabaha and Mudaraba financing and Ijarah Muntahia Bittamleek included
BD3,114,000 (2009: BD3,596,000) 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 for the year ended 31 December 2010 amounted to nil (31 December 2009: BD 250,000).

Compensation of key management personnel, consisting solely of short-term benefits, for the year was
BD1,695,000 (2009: BD2,182,000).

18 CONTINGENT LIABILITIES AND COMMITMENTS

The Group has the following commitments:

2010 2009
BD ‘000 BD ‘000
Contingent liabilities on behalf of customers
Guarantees 6,773 19,077
Letters of credit 1,645 1,675
Acceptances 432 409

8,850 21,161

Irrevocable Unutilised commitments

Unutilised financing commitments 27,970 13,473
Unutilised non-funded commitments 7,583 7,424
Unutilised capital commitments 1,502 5,681

37,055 26,578
45,905 47,739

AL SALAM BANK-BAHRAIN 79
 Notes to the Consolidated
Financial Statements (continued)
31 December 2010

18 CONTINGENT LIABILITIES AND COMMITMENTS (continued)

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 utilized, the total contract amounts do not necessarily represent future cash requirements.

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:

2010 2009
BD ‘000 BD ‘000

Within 1 year 429 665

After one year but not more than five years 85 86

514 751

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 settlement
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.

80 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 81
 Notes to the Consolidated
Financial Statements (continued)
31 December 2010

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.

82 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 2010 exposure 2009
BD ‘000 BD ‘000
ASSETS
Balances with other banks 2,879 4,756
Murabaha receivables from banks 137,299 149,304
Corporate sukuk 61,724 16,950
Murabaha and Mudaraba financing 100,642 58,352
Ijarah Muntahia Bittamleek 65,777 42,342
Musharaka financing 8,127 5,384
Assets under conversion 48,629 77,972
Receivables 9,399 26,012
Total 434,476 381,072
Contingent liabilities and commitments 33,652 48,490
Total credit risk exposure 468,128 429,562

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.

AL SALAM BANK-BAHRAIN 83
 Notes to the Consolidated
Financial Statements (continued)
31 December 2010

19 RISK MANAGEMENT (continued)

19.2 Credit risk (continued)

Type of credit risk

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

Murabaha financing
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 paid 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.

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

31 December 2010
Neither past due nor impaired Past due or
individually
‘A’ Rated ‘B’ Rated Unrated impaired Total
BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000

Balances with banks 2,604 36 239 - 2,879

Murabaha receivables from banks 84,853 15,084 37,362 - 137,299

87,457 15,120 37,601 - 140,178

31 December 2009
Neither past due nor impaired Past due or
individually
‘A’ Rated ‘B’ Rated Unrated impaired Total
BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000

Balances with banks 4,403 106 247 - 4,756

Murabaha receivables from banks 93,228 11,466 44,610 - 149,304

97,631 11,572 44,857 - 154,060

84 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 financing, Ijarah Muntahia Bittamleek,
Musharaka financing, Assets under conversion and financing that are subject to credit risk, based on internal
credit ratings, is as follows:

31 December 2010
Neither past due nor impaired
Substandard
but not Past due but
Satisfactory Watch List impaired not impaired Impaired Total
BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000

Corporate sukuk 61,724 - - - - 61,724

Murabaha and Mudaraba
financing 86,476 1,958 - 9,260 2,948 100,642
Ijarah Muntahia
Bittamleek 53,408 - 195 12,174 - 65,777
Musharaka financing 8,127 - - - - 8,127
Assets under conversion 48,629 - - - - 48,629
Receivables 11,276 41 - - - 11,317

269,640 1,999 195 21,434 2,948 296,216

31 December 2009
Neither past due nor impaired
Substandard
but not Past due but
Satisfactory Watch List impaired not impaired Impaired Total
BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000

Corporate sukuk 16,950 - - - - 16,950

Murabaha and Mudaraba
financing 37,512 7,539 - 13,301 - 58,352
Ijarah Muntahia
Bittamleek 31,647 - 3,960 6,735 - 42,342
Musharaka financing 5,384 - - - - 5,384
Assets under conversion 77,972 - - - - 77,972
Receivables 26,012 - - - - 26,012

195,477 7,539 3,960 20,036 - 227,012

AL SALAM BANK-BAHRAIN 85
 Notes to the Consolidated
Financial Statements (continued)
31 December 2010

19 RISK MANAGEMENT (continued)

19.2 Credit risk (continued)

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.

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

31 December 2010
0-30 days 31-90 days > 90 days Total
BD ‘000 BD ‘000 BD ‘000 BD ‘000

Murabaha and Mudaraba financing - 7,726 1,534 9,260

Ijarah Muntahia Bittamleek - 61 12,113 12,174

- 7,787 13,647 21,434

31 December 2009
0-30 days 31-90 days > 90 days Total
BD ‘000 BD ‘000 BD ‘000 BD ‘000

Murabaha and Mudaraba financing 1,741 4,610 6,951 13,302

Ijarah Muntahia Bittamleek 1,724 692 4,318 6,734

3,465 5,302 11,269 20,036

All the past due but not impaired Murabaha and Mudaraba financing and Ijarah financing are covered by
collateral of BD 29,933,000 (2009: BD 42,035,000). A provision of BD 1,508,000 has been taken against
the past due but not impaired facilities.

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 22,148,000 (2009: BD 9,520,000) of financing facilities to individuals were renegotiated.
All renegotiated facilities are performing and are fully secured.

At 31 December 2010, the amount of credit exposure in excess of 15% of the Group’s regulatory capital to
individual counterparties was nil (2009: nil).

86 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 2010, legal suits amounting to BD 1,686,000 (2009: BD 1,681,000) 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 consolidated financial position as the Group
also has filed counter cases against these parties.

AL SALAM BANK-BAHRAIN 87
 Notes to the Consolidated
Financial Statements (continued)
31 December 2010

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
2010 2010 2010 2009 2009 2009
BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000
Geographic region
GCC 778,449 644,613 43,494 718,881 560,809 32,550
Arab World 7,584 3,855 64 9,566 2,791 -
Europe 12,088 3,265 - 23,087 11,642 48
Asia 49,907 2,737 2,861 27,106 8,734 12,347
America 6,990 268 - 2,274 180 -
Others 2,345 - - 5,020 - 3,545
857,363 654,738 46,419 785,934 584,156 48,490
Equity - 202,625 - - 201,778 -
857,363 857,363 46,419 785,934 785,934 48,490

Industry sector
Trading and manufacturing 12,158 22,726 5,436 10,419 15,798 16,627
Banks and financial
institutions 208,260 142,136 211 257,170 143,697 344
Real estate 221,884 102,717 11,732 188,082 60,406 23,332
Aviation 12,872 29 - 10,373 9 -
Individuals 49,611 232,667 2,499 45,769 206,898 1,726
Government and
public sector 228,176 86,357 24,071 127,925 87,211 -
Others 124,402 68,106 2,470 146,196 70,137 6,461
857,363 654,738 46,419 785,934 584,156 48,490
Equity - 202,625 - - 201,778 -
857,363 857,363 46,419 785,934 785,934 48,490

88 AL SALAM BANK-BAHRAIN
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.

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:
2010
10% increase 10% decrease
Effect on Effect on Effect on Effect on
net profit Comprehensive income net profit Comprehensive income
BD ‘000 BD ‘000 BD ‘000 BD ‘000
Quoted:
GCC 321 667 (321) (667)
Asia - 805 - (805)
Unquoted 19,612 173 (19,612) (173)

2009
10% increase 10% decrease
Effect on Effect on Effect on Effect on
net profit Comprehensive income net profit Comprehensive income
BD ‘000 BD ‘000 BD ‘000 BD ‘000
Quoted:
GCC 434 173 (434) (173)
Unquoted 18,034 1,515 (18,034) (1,515)

Assets under conversion (Note 9) include quoted equities of BD 1,632,000 (2009: BD 1,727,000) and
unquoted equities of BD 1,733,000 (2009: BD 15,146,000). In determining the effect of price volatility on
above, equity positions included in assets under conversion have been considered.

AL SALAM BANK-BAHRAIN 89
 Notes to the Consolidated
Financial Statements (continued)
31 December 2010

21 MARKET RISK (continued)

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:
2010
Change in rate Effect on net profit Change in rate Effect on net profit
% BD ‘000 % BD ‘000
US dollars 0.25 246 (0.25) (246)
Bahraini dinars 0.25 483 (0.25) (483)
Sterling pounds 0.25 25 (0.25) (25)

2009
Change in rate Effect on net profit Change in rate Effect on net profit
% BD % BD
US dollars 0.25 180 (0.25) (180)
Bahraini dinars 0.25 344 (0.25) (344)

In addition to profit rate bearing financing contracts considered in arriving at the effect on net profits, the assets
under conversion includes BD52,150,000 (2009: BD81,088,000) financial assets and BD5,171,000 (2009:
BD120,001,000) 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 contracts on 1 January 2011, the change in profit rate by 0.25% would result in a profit or
loss of BD117,000.

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

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 :

2010 2009
BD ‘000 BD ‘000

US dollars 24,268 10,402

Saudi riyals 48,003 55,802
Singapore dollars 8,123 28

The effect on income solely duo to reasonably possible immediate and sustained changes in exhange rates
is as follows:
2010
Change in Effect on Change in Effect on
rate net profit rate net profit
% BD ‘000 % BD ‘000
US dollars to Bahraini dinars 1 243 (1) (243)
Saudi riyals to Bahraini dinars 1 480 (1) (480)
Singapore dollars to Bahraini dinars 1 81 (1) (81)

2009
Change in Effect on Change in Effect on
rate net profit rate net profit
% BD % BD
US dollars to Bahraini dinars 1 104 (1) (104)
Saudi riyals to Bahraini dinars 1 558 (1) (558)
Singapore dollars to Bahraini dinars 1 - (1) -

AL SALAM BANK-BAHRAIN 91
 Notes to the Consolidated
Financial Statements (continued)
31 December 2010

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 2010 and 2009:

31 December 2010

Up to 3 months 1 to 5 Over 5
3 months to 1 year years years Total
BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000
ASSETS
Cash and balances with banks
and Central Bank of Bahrain 76,824 - 18,967 - 95,791
Central Bank of Bahrain Sukuk 20,230 14,510 33,892 - 68,632
Murabaha receivables from banks 137,299 - - - 137,299
Corporate Sukuk - - 61,724 - 61,724
Murabaha and Mudaraba financing 25,016 35,513 50,901 9,382 120,812
Ijarah Muntahia Bittamleek 8,330 10,530 36,409 14,556 69,825
Musharaka financing 5,853 2,044 190 40 8,127
Assets under conversion 14,047 43,385 - - 57,432
Non-trading investments - 13,097 199,335 - 212,432
Investment in an associate - - 7,578 - 7,578
Investment properties - - - 3,373 3,373
Receivables and prepayments 11,394 1,085 - - 12,479
Premises and equipment - - 1,859 - 1,859

298,993 120,164 410,855 27,351 857,363

LIABILITIES AND UNRESTRICTED INVESTMENT ACCOUNTS

Murabaha and Wakala
payables to banks - - 101,300 - 101,300
Wakala from non-banks - 296,807 159,640 - 456,447
Customers' current accounts 57,362 - - - 57,362
Liabilities under conversion 5,171 - - - 5,171
Other liabilities 13,411 1,838 744 - 15,993
Unrestricted investment accounts - - 18,465 - 18,465

75,944 298,645 280,149 - 654,738

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

31 December 2009
Up to 3 months 1 to 5 Over 5
Total
3 months to 1 year years years
BD ‘000
BD ‘000 BD ‘000 BD ‘000 BD ‘000
ASSETS
Cash and balances with banks and
Central Bank of Bahrain 109,372 - 17,367 - 126,739
Central Bank of Bahrain Sukuk - 32,908 - - 32,908
Murabaha receivables from banks 149,304 - - - 149,304
Corporate Sukuk - - 16,950 - 16,950
Murabaha and Mudaraba financing 20,097 14,665 52,512 - 87,274
Ijarah Muntahia Bittamleek 7,063 10,121 22,179 6,952 46,315
Musharaka financing 5 16 5,363 - 5,384
Assets under conversion 30,901 17,156 50,248 - 98,305
Non-trading investments - - 184,680 - 184,680
Investment in an associate - - 7,659 - 7,659
Investment properties - - - 1,177 1,177
Receivables and prepayments 25,233 1,130 539 - 26,902
Premises and equipment - - 2,337 - 2,337
341,975 75,996 359,834 8,129 785,934

LIABILITIES AND UNRESTRICTED INVESTMENT ACCOUNTS

Murabaha and Wakala payables to banks - - 89,398 - 89,398
Wakala from non-banks - 47,882 269,488 - 317,370
Customers' current accounts 32,700 - - - 32,700
Liabilities under conversion 87,810 14,120 18,472 - 120,402
Other liabilities 13,512 1,097 268 - 14,877
Unrestricted investment accounts - - 9,409 - 9,409
134,022 63,099 387,035 - 584,156

AL SALAM BANK-BAHRAIN 93
 Notes to the Consolidated
Financial Statements (continued)
31 December 2010

22 LIQUIDITY RISK (continued)

The table below summarizes the maturity profile of the Group’s financial liabilities at 31 December, 2010
and 2009 based on contractual undiscounted payment obligation:

31 December 2010
On Up to 3 months 1 to 5 Over 5
demand 3 months to 1 year years years Total
BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000
LIABILITIES, UNRESTRICTED INVESTMENT
ACCOUNTS COMMITMENTS AND CONTINGENT LIABILITIES
Murabaha and Wakala payables
to banks - 100,810 490 - - 101,300
Wakala from non-banks - 296,807 140,251 19,389 - 456,447
Customers' current accounts 57,362 - - - - 57,362
Liabilities under conversion - 5,171 - - - 5,171
Unrestricted investment accounts - 18,465 - - - 18,465
Unutilised financing commitments 12,560 2,513 1,641 5,749 13,090 35,553
Unutilised capital commitments - - - 1,502 - 1,502
Contingent liabilities 1,191 2,277 4,888 494 - 8,850
Other financial liabilities - 11,583 1,114 - - 12,697
Profit due on financing contracts - 1,743 3,442 2,288 - 7,473
71,113 439,369 151,826 29,422 13,090 704,820

31 December 2009
On Up to 3 months 1 to 5 Over 5
demand 3 months to 1 year years years Total
BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000
LIABILITIES, UNRESTRICTED INVESTMENT
ACCOUNTS COMMITMENTS AND CONTINGENT LIABILITIES
Murabaha and Wakala payables
to banks - 89,398 - - - 89,398
Wakala from non-banks - 250,850 47,882 18,638 - 317,370
Customers' current accounts 32,700 - - - - 32,700
Liabilities under conversion - 87,810 14,120 18,472 - 120,402
Unrestricted investment accounts - 9,409 - - - 9,409
Unutilised financing commitments 13,749 - 3,052 4,097 - 20,898
Unutilised capital commitments - - 3,545 2,136 - 5,681
Contingent liabilities 19,119 538 1,504 - - 21,161
Other financial liabilities - 9,592 436 599 - 10,627
Profit due on financing contracts - 986 2,168 2,882 - 6,036
65,568 448,583 72,707 46,824 - 633,682

94 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 2010 was as follows:

31 December 2010
Banking Treasury Investments Capital Total
BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000
Operating income 11,854 2,890 5,108 2,527 22,379
Segment result 3,855 1,866 2,070 (475) 7,316
Other information
Segment assets 195,713 325,087 249,994 86,569 857,363

Segment liabilities, and equity 517,737 120,985 8,318 210,323 857,363

31 December 2009
Banking Treasury Investments Capital Total
BD ‘000 BD ‘000 BD ‘000 BD ‘000 BD ‘000
Operating income 7,887 2,500 5,583 7,709 23,679
Segment result 4,101 1,493 2,709 5,659 13,962
Other information
Segment assets 208,248 336,171 171,962 69,553 785,934
Segment liabilities, and equity 471,409 103,403 984 210,138 785,934

AL SALAM BANK-BAHRAIN 95
 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 48,137,000 (2009: BD 60,706,000). 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 Group’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 Group’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 2010 and 2009.

27 EARNINGS AND EXPENSES PROHIBITED BY SHARI’A

During the year, the Bank received income totaling BD 8,000 (2009: BD 56,000) 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
BD213,000 (2009: BD915,000) on account of charitable donations.

96 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 2010 has been determined by the Shari’a supervisory board
as 3.5 fils (2009: 3.8 fils) per share.

Pursuant to the Shari’a Supervisory Board’s directive, the prohibited income earned from the subsidiary’s
operations should be purified by the Group from the date of conversion. Since the Subsidiary’s operations
are not fully compliant with Shari’a Rules and Principles, the prohibited income has been calculated and
disclosed (Note 9). The Shareholders should purify the amount of prohibited income attributable to each
share by donating the relevant amounts of such prohibited income to charity. The prohibited income to be
donated by each shareholder for 2010 has been determined by the Shari’a Supervisory Board as 2.06 fils per
share.

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 2010 and 31 December 2009.

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

2010 2009
BD ‘000 BD ‘000

Capital base (Tier 1) 172,773 179,564

Credit risk weighted exposures 631,566 555,389

Market risk weighted exposures 9,700 2,950
Operational risk weighted exposures 58,372 68,803

Total risk weighted exposure 699,638 627,142

Capital adequacy 24.7% 28.6%

Minimum requirement 12.0% 12.0%

AL SALAM BANK-BAHRAIN 97
“
“Each leaf is a holistic functional unit influencing and
manufacturing the plant’s nutrition independently. The
plant’s survival relies on the right balance of these functioning
leaves who come together as a whole to help it survive.”