Bank Alkhair - Where Vision Inspires Progressbankalkhair.com/media/document/Annual Report 2013.pdf24 Investment Portfolio 26 Risk Management Review 35 Corporate Governance Review

Licensed as a wholesale Islamic bank by the Central Bank of Bahrain

Contents

2 Profile,MissionandValues3 InternationalPresence4 Financial Highlights6 Board of Directors8 Shari’ahSupervisoryBoard9 ExecutiveManagement10 Chairman’sMessage

12 ManagementReview20 FinancialReview24 InvestmentPortfolio26 RiskManagementReview35 CorporateGovernanceReview51 Consolidated Financial Statements

His Royal Highness Prince Salman bin Hamad

Al Khalifa

TheCrownPrince,DeputySupremeCommanderandFirst

DeputyPrimeMinister

His Royal Highness Prince Khalifa bin Salman

Al Khalifa

ThePrimeMinisterofThe Kingdom of Bahrain

His Majesty King Hamad bin Isa

Al Khalifa

The King of the Kingdom of Bahrain

2www.bankalkhair.com

InthenameofAllah,theMostBeneficent,theMostMerciful,PrayersandPeacebeuponourProphetMohammed,HisCompanionsandRelatives.

On behalf of the Board of Directors,itismyprivilegetopresenttheannualreportandconsolidatedfinancialstatementsofBank Alkhair for the year ended31December2013.IampleasedtoreportthattheBank’sninthfullyearofoperationswasmarkedbyanoverallnotableimprovementinperformancefromprioryears.

VisionTobealeadingglobalproviderofShari’ah-compliantfinancialservices

Values•Integrity•Honesty•Innovation•Transparency•Confidentiality•Professionalism

Profile, Mission and Values

Establishedin2004intheKingdomofBahrain,Bank Alkhair is a wholesale Islamic bank with aninternationalpresenceinSaudiArabia,MalaysiaandTurkey.TheBank’sprimaryfocusistoprovideclientswithaccesstoinnovativealternativeinvestmentopportunitiesintheMENAregion.BankAlkhairoffersaselectrangeofinvestmentbanking-relatedproductsandservices,includingassetmanagement,privateequity,corporatefinanceandcapitalmarketsadvisory.BankAlkhairseekstodeliverexceptionalvaluetoitsshareholdersandclientsbyfocusingoninnovation,professionalismandintegrity.Allproductsandtransactionsaregovernedbytwoessentialprinciples:thattheycomplyfullywiththerulesofIslamicShari’ah,andthattheyarebenchmarkedagainstinternationalfinancialbestpractice.

StringentcorporategovernancestandardsensurethattheBank,itsdirectorsandemployeesadoptthehigheststandardsofethicalconduct,andadheretotheprinciplesoffairness,transparency,accountabilityandresponsibility,inallday-to-daydealingsandoperations.

3Bank Alkhair B.S.C. (c) Annual Report 2013

International Presence

BankAlkhairseekstodeliverexceptionalvaluetoclientsandshareholdersthroughafocusoninnovation,professionalismandintegrity–thesharedvaluesthatdrivetheBank’sendeavourtobealeadingglobalproviderofShari’ah-compliantfinancialservices

Malaysia

BahrainSaudi Arabia

Turkey


Financial Highlights

5-Year Consolidated Performance Summary(AmountsinUS$thousands) 2013 2012 2011 2010 2009

Profit/(loss)fortheyearfromcontinuingoperations beforeZakahandimpairment 3,429 (39,208) (15,538) (173,692) 12,300

Profit/(loss)fortheyear 4,739 (39,763) 1,169 (229,496) 2,235

Total assets 628,590 442,155 483,032 727,948 1,033,619

Placementswithfinancialinstitutions 74,390 63,733 66,477 72,437 188,465

Financingreceivables 52,309 86,623 95,838 229,413 112,578

Investmentsecurities 79,186 112,905 130,383 123,002 247,999

Totalliabilities 380,004 246,275 247,866 525,542 609,967

Duetofinancialinstitutions 51,173 153,121 143,178 298,275 300,766

Duetocustomers 217,594 68,176 88,483 95,705 220,657

Equityattributabletotheshareholdersoftheparent 169,373 167,113 203,483 152,528 379,709

Totalequity 248,586 195,880 235,166 202,406 423,652

Returnonaverageassets(percent) 0.9% -8.6% 0.2% -26.1% 0.2%

Returnonaverageshareholders'totalequity(percent) 2.1% -18.4% 0.5% -73.3% 0.5%

Cost:incomeratio(percent) 90.1% n/a 159.6% n/a 81.5%

Financialleverage(percent) 158.7% 132.4% 113.8% 291.9% 150.5%

Capitaladequacyratio(percent) 15.2% 22.6% 21.6% 13.6% 23.1%

Note:Figuresofpreviousyearshavebeenreclassifiedforcomparativepurposes.

4,7392013

(39,763)2012

1,1692011

NetProfit

4,739

Total Assets

628,590TotalLiabilities

380,004628,5902013

442,1552012

483,0322011

380,0042013

246,2752012

247,8662011



Abdullatif Abdullah Al-ShalashNon-ExecutiveDirector

Dr. Ahmed Al-DehailanIndependentDirector

Hethloul Saleh Al-HethloulNon-ExecutiveDirector

Yousef A. Al-ShelashChairman

Ayman Ismail AbudawoodIndependentDirector

Khalid ShaheenIndependentDirector

Dr. Abdulaziz Al OrayerIndependentDirector

Ali Al-OthaimNon-ExecutiveDirector

Board of Directors


Abdullah AldubaikhiIndependentDirector

Khaled AbdulrahimIndependentDirector

Abdulrazaq Al-WohaibNon-ExecutiveDirector

Waleed AlasfoorIndependentDirector

Sultan AbalkheelIndependentDirector

Majed Al QasemNon-ExecutiveDirector

Dr. Khalid AteeqIndependentDirector

Board of Directors


Shari’ah Supervisory Board

Dr. Abdul Sattar Abu GhuddahChairman,Shari’ahExecutiveCommittee

Dr. Aagil Jasim Al-NashmyDeputyChairman

Dr. Mohammad Daud Bakar Sh. Nizam Mohammad Saleh YaqoubyDr. Ali Muhyealdin Al-Quradaghi

Dr. Khalid Mathkoor Al-MathkoorChairman


Executive Management Team

Kubra Ali MirzaChiefComplianceOfficer MLRO&BoardSecretary

Ayham GharaibehGeneralCounsel

Aziz Rehman SheikhChiefFinancialOfficer

Muhammad Abbas Khan HeadofGroupInternalAudit

Dr. Muhammad Al-Bashir M. Al-AmineGroupHeadofShari’ah

Ikbal Daredia ChiefExecutiveOfficer AlkhairInternationalIslamicBankBerhad

Jonathan H. HolleyActingChiefExecutiveOfficer& HeadofInvestmentBanking

Ali İlhanGeneralManager AlkhairPortfoyTurkey

Khalid Al-MulhimActingChiefExecutiveOfficer AlkhairCapitalSaudiArabia

Gülsevim KahramanGeneralManager AlkhairCapitalTurkey


Chairman’s Message

Aswestrivetomeetourambitiousgoals,weremainconstanttoourfocusoninnovationandprofessionalism

Total assets stood at US$628.6millionversusUS$442.2millionattheend of 2012

US$ 628.6 million

Total income grew to US$34.7millionfromUS$5.3millionin2012

US$ 34.7million


Chairman’s Message

In the name of Allah, the Most Beneficent, the Most Merciful, Prayers and Peace be upon our Prophet Mohammed, His Companions and Relatives.

OnbehalfoftheBoardofDirectors,it ismyprivilegetopresenttheannual reportandconsolidatedfinancialstatementsofBankAlkhairfortheyearended31December2013.IampleasedtoreportthattheBank’sninthfullyearofoperationswasmarkedbyanoverallnotableimprovementinperformancefromprioryears.

During2013,wesuccessfullycompletedtheprocessofrestructuringand realigning our domestic and international banking operations;improved the performance and asset quality of our portfoliocompanies; and achieved our stated goal of returning the Bank toprofitability. These achievements, which took place against theheadwinds of continued global economic volatility and challengingmarket conditions, constitute an important milestone for BankAlkhair. The Bank continued to witness a substantial improvementin the performance and quality of its portfolio assets during 2013,whichcontinuetobeamajorcontributortototalrevenues.Notableachievementsin2013includeBahrainFinancingCompanyexpandingits international operations into India and Malaysia; while t‘azurCompanyestablishedafully-licensedtakafulcompanyinOman,andhasfiledforanIPOontheMuscatSecuritiesMarketduringthefirstquarter of 2014. Elsewhere, the Al Tajamouat Mall – the premierupscaleshoppingandentertainmentcomplexinJordan–whichwaslaunchedin2012isnowcompletedandfullylettoprimeoccupants.

IamdelightedtoreportthatthesesuccessfulstrategicandbusinessachievementsenabledtheBanktomeet itsstatedgoalofreturningto profitability in 2013. Net profit for the yearwasUS$ 4.7millioncomparedwithalossofUS$39.8millionin2012;whiletotalincomegrewtoUS$34.7millionfromUS$5.3millionin2012.Attheendoftheyear,totalassetsstoodatUS$628.6millionversusUS$442.2millionattheendof2012;withtotalequitygrowingtoUS$248.6millionfromUS$195.9millionattheendofthepreviousyear.

Throughout2013,wecontinued toenhance theBank’s institutionalcapability,withthefurtherstrengtheningofourcorporategovernanceandriskmanagementframeworks.Wealsoresumedrecruitmentofhigh-calibreprofessionalstostrengthenourinvestmentbankingteaminBahrain,whilecontinuingtoenhancetheskillssetsofexistingstaff.At the same time, we initiated the development of a world-classprivate cloud and integrated business continuity planning platformfromaleadingglobalspecialistITprovider,throughwhichtoensurethe highest levels of data integrity and protection of our clients’information.

The Board of Directors’ current three-year term expired in 2013.Following the election of the new Board, I would like to thank theoutgoing Directors for their valuable contributions, and welcomethe eight new Directors. Their diverse knowledge, experience andexpertise,andcommitmenttothehigheststandardsofgovernance,will help the enlarged Board guide the Bank in implementing itsstrategyofbusinessgrowthandsustainableprofitability.

Looking forward to2014,weareoptimisticabout theBank’s futureprospects.Operationally,wehavedeveloped a strategy to diversifyourrevenuestreamsbygrowingsignificantlyourcommercialactivitiestobalanceourportfolio revenues.Wealsohaveambitiousplans toexpandourcapitalmarketsbusiness,anddouble its contribution tototalincomeduringtheyearahead.

Themeasureswehavetakenoverthepastfewyearstoredefineourstrategyandbusinessmodel,andstrengthenouradoptionofsoundgovernanceprinciples,haveplacedusinastrongerpositiontogrowourshareof thefast-growing Islamicfinance industry,whoseassetsare forecast to hit theUS$ 2 trillionmark by the end of 2014. TheconsensusofdelegatesattherecentWorldIslamicBankingConferenceinBahrain,andtheWorldIslamicEconomicForuminLondon,isthattheIslamicfinanceindustryhastrulycomeofageasadriverofglobaleconomicgrowth.Suchaviewisstrongvalidationofthepioneeringvision and foresight of our founding shareholders. Nine years on,Bank Alkhair is strongly placed to take advantage of the improvingeconomic environment to capture new business opportunities andgrowitsglobalfootprint.Aswestrivetomeetourambitiousgoals,weremainconstanttoourfocusoninnovationandprofessionalism;andourcommitmenttotheprinciplesofIslamicShari’ah,andthehigheststandardsoffairness,transparency,accountabilityandresponsibility.

Inconclusion,onbehalfoftheBoardofDirectors,Iexpressmysincereappreciation to our shareholders for their enduring support andconfidence; to our Shari’ah Supervisory Board for its guidance andcounsel;andtoourclientsandbusinesspartnersfortheirtrustandcollaboration.Inparticular,IthanktheGovernmentofBahrainanditsleaders for theirencouragementandsupportof the Islamicbankingsector. Special acknowledgement is alsodue to theCentralBankofBahrain and the regulatory bodies in other jurisdictions where weoperate, fortheirconstructiveadviceandcooperation.Finally, Ipaytribute to the dedication, commitment and positive attitude of ourmanagementandstaffaroundtheworld;andtheircontributiontotheprogressofBankAlkhairinachallengingbutsuccessfulyear.

MayAllahguideusontheproperpath,andleadustotherealisationofourgoalsforthefuturesuccessoftheBank.

Yousef Abdullah Al-ShelashChairman of the Board

27February2014


Management Review

BUSINESS LINESINVESTMENT BANKINGIn2013,BankAlkhaircompletedthestreamliningofitsBahrain-basedinvestmentbankingdivision.ThisincludesarevisedstrategyandbusinessmodelwhichseekstoprovideclientswithaccesstoinnovativealternativeinvestmentopportunitiesintheMENAregion.TheBank’sprimaryfocusisintheprivateequityarea,concentratingonindustrysectorsthatincludeoilandgas,industrialservices,logistics,utilitiesandinfrastructure,agribusinessandfood-relatedindustries.Followingatypicalmerchantbankingmodel,BankAlkhairengagesintransactionorigination,investmentstructuring,placementtoco-investors,post-acquisitionmanagementandassetrealisation;andplacesparticularemphasisonenhancingvalueateachstageoftheinvestmentcycle,withaprimaryaimofexitingsuccessfully.

Duringtheyear,BankAlkhairfinalisedtherealignmentofitsinternationalbankingoperationstocomplementthenewinvestmentbankingfocus,andtopositionthemforgreatergrowthandprofitabilityin2014.Withthesuccessfulcompletionofthisexercise,theBankiswell-equippedtoresumerevenue-generatingtransactionalactivities,andcapitaliseonitstrackrecordforarrangingsuccessfulSukukissues.

BankAlkhairalsocompletedtherestructuringofitsassociatecompaniesandaffiliatestobolstertheirperformance,andmaximisethepotentialforprofitableexitsinthefuture.Potentialdivesturesin2014includeBurjBankandOpenSilicon,whiletherehasbeenincreasedinterestinTintoriaInternationalandAl-TajamouatforTouristicProjectsCompany.Suchexitswillprovideadditionalliquidityforfurtherselectinvestmentsinpreferredindustrysectorsandcoregeographies.TheBankalsoplanstocloseitsGlobalPrivateEquityFundsinceitisnearingtheterm-end.Launchedin2007,theFundwasaffectedbytheglobalfinancialcrisis,butthereturntoinvestorsisexpectedtobegreaterthantheiroriginalinvestment.

Successfulstrategicandbusinessachievementsduringtheyearenabled Bank Alkhair to meet itsstatedgoalofreturningtoprofitabilityin2013

NetprofitfortheyearwasUS$4.7millioncomparedwithalossofUS$39.8millionin2012

US$4.7 million


AlTajamouatMall(TajMall),thepremierupscaleshoppingmallandentertainmentcomplexinAmman,Jordanisnowfullyoperational,andhasachievedanoccupancyrateof93Percentatpremiumleaserates,withactiveinterestintheremainingspace.Oneofthehighest-yieldingshoppingmallsintheGCC,itsfootfallhasmorethandoubledsinceopening

50.63%Shareholding

Fund: AlTajamouatforTouristicProjectsCompany

Sector: TourismLocation: Amman,Jordan


In2013,t’azurwasinstrumentalintheestablishmentofTakafulOman,thefirstShari’ah-compliantinsurancecompanyintheSultanate.TheCompany’sinitialpublicofferingraisedUS$60million,andwas5.5timesoversubscribed.TakafulOmanplanstolistontheMuscatSecuritiesMarketinearly2014

25.86%Shareholding

Fund: t’azurCompanySector: TakafulLocation: Bahrain,Kuwait,Qatar

and Oman


Management Review

SUBSIDIARIESMalaysiaEstablishedin2007,AlkhairInternationalIslamicBankBerhadisthefirstforeignIslamicbankinMalaysialicensedtoconductafullrangeofnon-MalaysianRinggitbankingactivitiesundertheMalaysiaInternationalIslamicFinancialCentreinitiative.Operatingunderafull-fledgedcommercialbankinglicence,thecorebusinesslinesofAlkhairMalaysiaarecorporatebanking,treasuryandcapitalmarkets.

In2013,theBank’sgrossfinancingtoclientsdecreasedfromthepreviousyearduetoalowerappetiteforUSDollarfinancinginthelocalandregionalmarkets,andincreasedcompetitionbylocalbanksformarketshare.TreasurycontinuedtoplayanactiveroleintheprimaryandsecondarySukukmarkets,withcapitalgainsfromthesaleofSukuksrisingmorethanseven-fold.TheBankwasalsosuccessfulingrowingitscapitalmarketadvisoryfees.

TurkeyAlkhairCapitalMenkulDegerlerA.S(AlkhairCapitalTurkey)wasestablishedin2007followingtheacquisitionbyBankAlkhairoftheTurkishassetmanagementandbrokeragecompanyInterYatrimMenkulDegerlerA.S.,anditssubsidiaryInterPortfoyYonetimiA.S.ThemainbusinesslinesofAlkhairCapitalTurkeyareprivateequity,assetmanagement,realestate,brokerageandresearch.

In2013,theBankcompletedthestreamliningofitsoperationstosupporttherestructuringofBankAlkhair’sinvestmentbankingbusinessinBahrain.Marketconditionsprovedchallengingduringtheyearduetosocio-politicalunrestandadropinthevalueofTurkishlira,whichaffectedcapitalmarketsactivity.WiththeplannedintroductionofnewSukukregulationsinTurkeyin2014,AlkhairCapitalTurkeyiswell-positionedtotakealeadingroleinarrangingcustomisedSukuksforplacementinMalaysia.TheBankisplanningtolaunchaShari’ah-compliantreal-estatefundin2014;establishpartnershipswithinternationalpartnerstoarrangesyndicatedIslamicfacilities;andsecurenewfinancingbusinesswithfoodandagribusinesscompanies.

Saudi ArabiaAlkhairCapitalSaudiArabiawasestablishedin2009.TheCompany’scorebusinesslinesareassetmanagementandbrokerage,togetherwithcorporatefinanceandinvestmentbanking,whichprovidesclientswithabroadrangeofcorporateadvisoryservicesandsolutions,withaspecificfocusoncapitalplanningandfundraising,financialrestructuring,andmergersandacquisitions.

In2013,AlkhairCapitalwassuccessfulinattractingnewclientsandsecuringnewbusinessacrossitsthreecorebusinesslines.TheCompanylauncheditsSaudiEquityFund,andgrewdiscretionaryassetsundermanagementfromnewandexistingclients.Itisplanningtolaunchadditionalpublicandprivatefundsin2014.AlkhairCapitalalsoincreaseditsinstitutionalbrokerageclientbaseandtradingvalue,andintroducedanewserviceforhighnet-worthindividuals.TheCompanysecuredtwonewcorporateadvisorymandatesduringtheyear–anequity-arrangingdealforaclientintheindustrialsector,andasell-sidetransactionforacompanyoperatinginthelogisticssector.Inaddition,AlkhairCapitalacquiredprimerealestatepropertiesinSaudiArabiathatwillgeneraterecurringincome.

TotalequitygrewtoUS$248.6millionfromUS$195.9millionat the end of the previousyear

US$248.6 million


Management Review

ASSOCIATE COMPANIES AND AFFILIATESBFC Group HoldingsIn2013,BFCenteredtheMalaysianmarket,increaseditspresenceinIndia,andexpandeditsglobalbranchnetworkby30Percentto113branches.TheGroupcontinuedtoenhanceitsIToperatinginfrastructure,andincreasedthetotalheadcountby14Percentto918employees.BFCwasincludedinthe2013WorldFinance100,whichhonourspioneeringcompaniesandbusinesspeoplearoundtheworld.

t’azur CompanyDuring2013,t’azurwasinstrumentalinestablishingTakafulOman,thefirstShari’ah-compliantinsurancecompanyintheSultanate.TheCompany’sinitialpublicofferingraisedUS$60million,andwasoversubscribed5.5times.TakafulOmanplanstolistontheMuscatSecuritiesMarketinearly2014.

Burj BankBurjBankwasnamedthe‘BestIslamicBank-Pakistan’inthe2013WorldFinanceAwards.AccordingtotheKarachiStockExchange,MCBBank–thefourth-largestcommercialbankinPakistan–announcedthatithadreachedanunderstandingwiththemajorityshareholdersofBurjBanktoacquirea55PercentshareholdingintheBank.

Tintoria InternationalTintoriaInternationaloperatesCleanSwift,aleadingindustriallaundryandtextileservicesproviderbasedinDubai.In2013,CleanSwiftwasappointedtheexclusivelaundryprovidertotheOfficeofthePrimeMinisteroftheUnitedArabEmirates;andalsoextendeditsspecialisttextilecareservicesintheareasoflaboratoryfabrictesting,linenprocurementsupport,trainingforhotelhousekeepingstaff,andlinenleasing.

Open SiliconTherestructuringoftheCompanywascompletedin2013,includinga30Percentreductioninheadcount.OpenSilicongrewitsrevenuesduringtheyear;andhasnowcompletedover300designs,andshippedmorethan90millionchipswithareturnrateofonly0.0003Percent.TheCompanyiscurrentlydevelopingspecialisedASICsforclientsinvolvedinBitcoinmining.

Turquoise Coast Investment CompanyTheCompany’s23-acremixedhospitalityandresidentialrealestatedevelopmentatBodrum,overlookingtheturquoisewatersofKoyunbabaBay,isnowenteringitssecondphase.Thiscomprisesahotelandspa,andthesecondtrancheofresidencesforsale;togetherwithamenitiesincludingaprivatebeach,swimmingpools,naturepathsandfunicularrailway,togetherwithseveralsignaturerestaurants.

TheBankcontinuedto witness a substantialimprovementintheperformanceandqualityofitsportfolioassetsduring2013


Fund: BFCGroupHoldingsSector: FinancialservicesLocation: Bahrain,Kuwait,

Malaysia,IndiaandUK

43.36%Shareholding

TheBFCGroupcurrentlyoperatesintheUnitedKingdom,Malaysia,India,KuwaitandBahrainthrougha global network of 113 retail branches.Inaddition,throughitsproprietaryEzRemitmoneytransferservice,BFCispresentin30countrieswithover44,000correspondentagentlocations.TheGroupalsohasanextensiveglobal reach of more than 200 countriesthroughitspartnershipwithMoneyGram,aleadinginternationalremittancecompany


Fund: TintoriaInternationalSector: Laundryandtextile

servicesLocation: Dubai,UAE

TintoriaInternationaloperatesCleanSwift,aleadingindustriallaundryandtextileservicesproviderbasedinDubai.CleanSwifthasbeenfullyoperationalsince2012andtheBankhassuccessfullypositionedthecompanyasaleaderinthelaundryservicesmarketintheUAE.In2013,CleanSwiftwasappointedtheexclusivelaundryprovidertotheOfficeofthePrimeMinisteroftheUnitedArabEmirates

41.44%Shareholding


Management Review

SHARED SERVICESHuman ResourcesHavingcompletedtherestructuringoftheorganisation,theBankhasnowresumedrecruitmentofhigh-calibreprofessionalstostrengthentheinvestmentbankingteaminBahrain,whilecontinuingtoenhancetheskillssetsofexistingstaff.Thefocusisonthecontinuousprofessionaldevelopmentofstaff,withkeypersonnelattendingspecialisedtrainingprogrammes.

BankAlkhairalsoparticipatesintheTamkeencareerdevelopmentprogramme,andhashiredtwoBahrainiuniversitygraduatestodate,oneofwhomhasjoinedtheBankonapermanentbasis.TheBankhasintroducedanewperformancemanagementsystem,whichincorporateskeyperformanceindicators(KPIs)forallstaff,basedonrevisedjobdescriptionsandcorecompetencies;whileremunerationpackageshavebeenbenchmarkedagainstcurrentmarketrates.

Information TechnologyBankAlkhairiscommittedtotheutilisationofleading-edgeinformationandcommunicationstechnology(ICT)asakeystrategicdriverandbusinessenabler.In2013,theBankinitiatedthetransformationofitsexistingICTinfrastructuretoaworld-classprivatecloudandintegratedbusinesscontinuityplanningplatformfromaleadingglobalspecialistITprovider.

Thisdevelopment,whichwillprovide99.9Percentuptimeandfulldisasterrecoveryfacilities,willensurethehighestlevelsofdataintegrityandprotectionofclients’information.

Phaseoneofthenewprivatecloudisplannedtobefullyoperationalbytheendofthefirstquarterof2014.PhasetwowillinvolveextendingittoincorporatetheBank’sinternationalbankingoperations.


Financial Review

BankAlkhairreportedanetprofitofUS$4.7millionfortheyearended31December2013comparedtoanetlossofUS$39.8millionin2012.TheBank’sfocusoncontinuingtostrengthenitscorebusinessareas,togetherwithanincreaseincommercialactivities,resultedinareturntoprofitabilityin2013.Thesteadyimprovementofglobalandregionalfinancialmarkets,whichgainedmomentumduringtheyear,enabledtheBanktogenerateincomefromfee-basedtransactions.

Thenetprofitreportedin2013wasdrivenprimarilybyincomefromthegainonacquisitionfromassetsheld-for-sale,andincomefrominvestmentsecurities;inadditiontoimprovedoperatingefficiencyandtherefocusedbusinessmodeloftheBank’scommercialactivities.

Operating Income

(US$millions)31 December

201331 December

2012

Fees and commission income 7.0 3.8

Incomefrominvestmentsecurities 7.2 (10.7)

Shareofprofitofequity-accountedinvestees 5.8 10.6

Gainonacquisitionofassetsheld-for-sale 14.5 -

Sub-total 34.5 3.7

Netfinance(expense)/income (1.2) 0.9

Other income 1.4 0.7

Total 34.7 5.3

Bank Alkhair is well placed to further build its franchise and secure sustainable profitability going forward

TheBank’sfocusoncontinuingto strengthen its core businessareas,togetherwithan increase in commercial activities,resultedinareturntoprofitabilityin2013


Financial Review

Fees and commission income increased by 84% to US$7.0million in 2013 compared to US$3.8million in 2012. The increase wasmainlyattributabletoadvisoryandarrangementfees,withtheBankactingas jointbookrunnerand leadShari’ahadvisor inthesuccessfulclosingof the US$750million Sukuk Programme established by Dar Al-Arkan, a leading residential real estate developer in the Kingdom of SaudiArabia.Thefirstissue,whichwasfourtimesoversubscribed,closedatUS$450million,withtheoverallbookorderreachingUS$1.68billion.ManagementfeesfromtheBank’sGlobalPrivateEquityFundIandStrategicAcquisitionFundwereUS$2.3million,representingaslightincreaseoverthepreviousyear.AlkhairCapitalSaudiArabiasuccessfullylauncheditsfirstShari’ah-compliantSaudiEquityFund,whichalsogeneratedmanagementfeesin2013.

TheoverallgainfrominvestmentsecuritieswasUS$7.2millioncomparedtoalossofUS$10.7millionin2012.Thiswasmainlyduetoamark-to-marketgainononeoftheBank’smajorinvestmentsinAlTajamouatMall(TajMall),anupscaleshoppingandentertainmentcomplexinAmman,Jordan. Further, fair valuegainswerealso recorded in theStrategicAcquisitionFund,due to improvements in theunderlying investments.However,thiswasoffsetagainstfairvaluebooklossestakenagainsttheUnicornGlobalPrivateEquityFundIandTintoriaInternational,theBank’sinvestmentinCleanSwift,alaundrybusinessbasedintheUnitedArabEmirates.Anindustrialandhotellaundryservicescompany,CleanSwifthasbeenfullyoperationalsince2012.TheBankhassuccessfullypositionedthecompanyasaleaderinthelaundryservicesmarketintheUAE,anditisnowshowingsignificantimprovementinperformanceandrevenues.

PriortotheacquisitionofanadditionalstakeinTajMallon31May2013,themark-to-marketvaluationoftheBank’sinvestmentinTajMallwasbasedonthesharepriceofAl-TajamouatforTouristicProjectsCompanylistedontheAmmanStockExchange.ThisaccountingtreatmentresultedinagainofUS$7.9millioncomparedtoalossofUS$15.1millionin2012.Themallhasbeenfullyoperationalthroughout2013andisnowachievinganoccupancyrateofover93%atpremiumleaserates,withsustainableincomefortheforeseeablefuture.ItislocatedintheAbdounDistrictofAmman,Jordan,whichisaprestigious,mainlyresidentialneighbourhoodtothesouthofthecitycentre.

On31May2013, theGroupacquiredacontrollingstake inAl-Tajamouat forTouristicProjectCompany,bringing itsoverall shareholdingto50.63%,andresultinginAl-Tajbecomingasubsidiary.TheBankrecognisedagainonacquisitionofUS$14.5millionintheconsolidatedincomestatement for the full year2013.BankAlkhairhasanactiveplan,whichhasbeenapprovedby theBoard, tosuccessfullyexit its stakeandtherefore, inaccordancewithacquisitionaccounting requirements, thenet identifiableassetsand liabilities recognisedonacquisitionweremeasuredattheirfairvalueonthedateofacquisitionandhavebeenclassifiedasheld-for-sale,andrecordedintheconsolidatedstatementoffinancialposition.For2013,theBank’snetincomefromassetsheld-for-salewasUS$3.5millionagainstthepreviousyearofUS$0.064million,withthebalancein2012beingderivedfromtheBank’sexitfromtwoofitsUSinvestmentsinpreviousyears.

Bank Alkhair continued to focus its efforts during the year onmanaging and bolstering the performance of its portfolio investments andpositioningthemforsustainablegrowthandprofitableexitsoverthecomingyears.TheBankreportedprofitfromitsshareofprofitofequity-accountedinvestees’activitiesofUS$5.8millionin2013,downfromaprofitofUS$10.6millionin2012.

ThemaindriverofthedecreasewasduetotheBankrecordingaone-offshareofprofitfromitsinvestmentint’azurin2012,aregionaltakafulcompany established by BankAlkhair in 2007. The Bank recorded a one–off incomeofUS$ 3.1million due to a change in the accountingmethodologyin2012usedtocalculatetheunearnedcontributionreserve,excludingWakalafees,whichwerepreviouslydeductedfromtheamount.Duringtheyear,t’azurcontinuedtobuilditsfranchiseandexpanditspresenceintheGCC.TheCompanyestablishedafully-licensedTakafulcompanyinOman,andfiledforanIPOontheMuscatSecuritiesMarketduringthefirstquarterof2014.TherevenuesofBFCGroupHoldingsshowedaslightdecline,whichwasalsoduetocontinuedinternationalexpansion,withofficesopeninginIndiaandMalaysia.

During the year, the Bank’s net finance income decreased, due mainly to the negative funding charge, since financing expense came inhigherthanthepreviousyearatanetexpenseofUS$1.2millionagainstanetincomefromfinancingofUS$0.9millionin2012.BankAlkhairleveraged its financial position and replaced expensive funding, aswell as ensuring that it had adequate liquidity to cover all outstandingmaturities.Consequently,overallnetfinanceexpenseincreased.TheBank’sotherincomewasalsohigher–atUS$1.4millionin2013against US$0.7millionthepreviousyear.


Financial Review

Operating Expenses


201331 December

2012

Staff cost 15.3 19.1

Legalandprofessionalexpenses 7.9 13.4

Premises cost 2.2 2.8

Businessdevelopmentexpenses 0.6 1.1

Depreciation 1.0 1.9

Otheroperatingexpenses 4.2 6.2

Non-staff cost 15.9 25.4

Total expenses 31.2 44.5

Cost : income ratio (Percent) 90.1% n/a

Period end headcount 99 106

Overalloperatingexpensesdecreasedby30%toUS$31.2millionin2013fromUS$44.5millionin2012.ThedecreasewasmainlyduetothereductioninstaffcostandlegalexpensesforvariouslegalproceedingsandactionsfiledbytheBank.StaffcostdecreasedfromUS$19.1millionin2012toUS$15.3millionin2013,areductionof20%duetofurtherre-alignmentanddeploymentofresources,bywhichtheBankexpectstogeneraterevenuesfromincreasedcommercialactivity.OperatingexpensesacrosstheGroupreducedsignificantly in linewiththeBank’sstrategytostreamlineitsoperationsandfocusononeprimarybusinessfunction–investmentbanking.TheBankremainscautioussincevariousothereconomicfactorsmaycomeintoplayin2014andimpactdealflowandbusinessactivity.Itwilladheretostringentcostmeasuresdespitebusinessconfidencesignificantlyimprovingin2013.

Financial Position Analysis

Selected financial position data (US $ millions)31 December

201331 December

2012

Cash and balances with banks 15.8 8.0

Placementswithfinancialinstitutions 74.4 63.7

Total cash and cash equivalents 90.2 71.7

Financingreceivables 52.3 86.6

Other assets 7.4 26.0

Assetsheld-for-sale 216.8 18.9

Duetofinancialinstitutions&customers 268.8 221.3

Equityattributabletotheshareholdersoftheparent 169.4 167.1

Non-controllinginterests 28.4 28.8

Non-controllinginterestsrelatedtoassetsheld-for-sale 50.8 -

Total equity 248.6 195.9

Total liabilities and equity 628.6 442.2

Return on average shareholders’ equity (Percent) 2.1% -18.4%

Return on average assets (Percent) 0.9% -8.6%

Liquidity ratio (Percent) 50.8% 71.6%

Leverage ratio (Percent) 158.7% 132.4%


Financial Review

Asat31December2013,BankAlkhair’stotalassetsincreasedbyUS$186.4milliontoUS$628.6millionfromUS$442.2millionattheendof2012.ThiswasmainlyattributabletothenetassetsacquiredinAlTaj,whichresultedinitbecomingasubsidiary;togetherwithanoverallincreaseinliquiditytocovertheBank’sobligationsandoperationalcashflowrequirements.CashandcashequivalentsincreasedbyUS$7.8milliontoUS$15.8millionin2013fromUS$8.0millionthepreviousyear.In2013,assetsheldforsaleincreasedbyUS$197.9milliontoUS$216.8millionfromUS$18.9millionin2012,duetothenetresultofoperationsofthesubsidiaryacquiredduringtheyear(Al-Tajamouat–seeNote7totheFinancialStatementsonpageno.71).InvestmentpropertyincreasedbyUS$56.0milliontoUS$73.7millionfromUS$17.7millionin2012.Duringtheyear,theBankacquiredincome-generatingassetsintheformoflandandbuildingsintheKingdomofSaudiArabiathroughitssubsidiaryAlkhairCapitalSaudiArabia.OtherassetsdecreasedbyUS$18.5milliontoUS$7.4million fromUS$25.9million in2012asreceivablesweresettled,furtherimprovingtheBank’sliquidityposition.

Non-controllinginterestsfromassetsheld-for-sale(US$50.8million)relatetotheminorityinterestwhentheBankacquiredanadditionalstakeinTajMallin2013.FinancingreceivablesreducedtoUS$52.3millionin2013fromUS$86.6millionthepreviousyearasfinancingtocustomersmatured,mainlyrelatedtotheBank’scorporatebankingbusinessinMalaysia.

Asat31December2013,theBankhadtotalbankandnon-bankborrowingsofUS$268.8millionintheformofreverseMurabahaandWakaladeposits,anincreaseofUS$47.5millionfromUS$221.3millionattheendof2012.Shareholders’equityattributabletotheparent,asreportedon 31December 2013, increased byUS$2.2million toUS$169.3million fromUS$167.1million at the end of 2012.Overall, the net profitattributabletotheBank’sshareholderswasUS$3.3millionin2013.

Thesubstantialmeasurestakenduringtheyeartostrengthenoperationsandtheinvestmentportfolio,leaveBankAlkhairwellplacedtofurtherbuilditsfranchiseandsecuresustainableprofitabilitygoingforward.TherefocusedbusinessstrategyinBahrainandTurkeywillseetheBankgeneraterecurringincomefromfee-basedtransactions.BankAlkhair’sinvestmentinitsSaudiandMalaysiansubsidiarieswillresultinincreasedrevenuegenerationinlinewiththeirbusinessmodels.Furthermore,thesubstantialimprovementintheperformanceoftheBank’sportfolioinvestmentsandprofitabilityin2013,willleadtoanumberofprofitableexitsinthefuture.


Investment Portfolio

BFC Group Holdings Shareholding 43.36%Sector/Industry Financial servicesLocation Bahrain, Kuwait, Malaysia, India and UK

Headquartered in the Kingdom of Bahrain, BFC Group Holdings (BFC Group) is a leading internationalremittance, foreignexchangeand currency trading institution.BFCGroupwas formed in2009whenBankAlkhair acquired a significant stake inBahrain FinancingCompany, established in 1917as thefirst foreignexchangefirm inBahrain.Theacquisitionalso includedBahrainExchangeCompany inKuwaitandEzRemitLimited(nowBFCExchangeLimited)intheUnitedKingdom.Sincethen,theGrouphaslaunchedBFCForexinIndiaandBFCExchangeinMalaysia,andhasplansforfurtherexpansion.The BFCGroup currently operates in theUnited Kingdom,Malaysia, India, Kuwait and Bahrain through aglobalnetworkof113retailbranches.Inaddition,throughitsproprietaryEzRemit moneytransferservice,BFCispresentin30countrieswithover44,000correspondentagentlocations.TheGroupalsohasanextensiveglobal reachofmore than200countries through itspartnershipwithMoneyGram, a leading internationalremittancecompany.

t’azur Company Shareholding 25.86%Sector/Industry TakafulLocation Bahrain, Kuwait, Qatar and Oman

Establishedin2007byBankAlkhair,t’azurisaBahrain-basedTakaful(Shari’ah-compliant)regionalinsurancegroup, offering a comprehensive range of Takaful products for individuals and businesses. The Group’sregionalpresenceextendstoKuwait,QatarandOman.Thet’azurTakafulInsuranceCompany,whichwasestablishedinKuwaitin2007,hasaBa1insurancefinancialstrengthratingwithastableoutlookfromMoody’s.In2009,t’azurreceivedapprovalfromtheQatarFinancialCentreRegulatoryAuthority tooperateaGeneralTakafulbusinessat theQatarFinancialCentre (QFC). In2013,t’azurwasinstrumental intheestablishmentofTakafulOman,thefirstShari’ah-compliant insurancecompany in the Sultanate. The Company’s initial public offering raisedUS$ 60million, andwas 5.5 timesoversubscribed.TakafulOmanplanstolistontheMuscatSecuritiesMarketinearly2014.Thet’azurCompanyprovidesFamily&HealthcareTakafulandGeneralTakaful(motor,homeandpersonalaccident) for individuals; and Employee Protection & Healthcare and General Takaful (fire, engineering,marinecargoandliability)forbusinesses.

Burj Bank Shareholding 37.91%Sector/Industry Retail bankingLocation Pakistan

BurjBankisoneoffivefull-fledgedIslamiccommercialbanksinPakistan.Itwasestablishedin2007astheDawoodIslamicBank,andrenamedin2011.BankAlkhairisthelargestshareholderwitha37.91Percentstake,followedbytheJeddah-basedICD–theprivatesectorarmoftheIslamicDevelopmentBankGroup–withashareholdingof33Percent.BurjBankoperatesthroughanetworkof75branchesin25citiesinPakistan.ItprovidesacomprehensiverangeofShari’ah-compliantbankingproductsandservicesforindividualcustomersandcorporateclients,includingsmall-and-mediumenterprises(SMEs).TheBankalsooffersinvestmentandcorporateadvisory services.BurjBankwasnamedas the ‘Best IslamicBank -Pakistan’ in the2013World FinanceAwards.Inarecentdevelopment,theKarachiStockExchangeannouncedthatMCBBank–thefourth-largestcommercialbankinPakistan–hadreachedanunderstandingwiththemajorityshareholdersofBurjBanktoacquirea55PercentshareholdingintheBank.

Al Tajamouat for Touristic Projects Company

Shareholding 50.63%Sector/Industry TourismLocation Amman, Jordan

TheAl-Tajamouat forTouristicProjectsCompany,which is listedon theAmmanStockExchange,operatesinthe leisureandrecreationsectorofJordan.TheCompanyownsandoperatestheAl-TajamouatLifestyleCentre(AlTaj),thepremierupscaleshoppingmallandentertainmentcomplex inAmman,Jordan.AlTaj islocatedintheAbdounDistrictofAmman,Jordan,whichisaprestigious,mainly-residentialneighbourhoodtothesouthofthecitycentre.Launchedin2012,AlTajisnowfullyoperational,andhasachievedanoccupancyrateof93Percentatpremiumleaserates,withactiveinterestintheremainingspace.Oneofthehighest-yieldingshoppingmallsintheGCC,itsfootfallhasmorethandoubledsinceopening.AlTajisamulti-purposefacility,comprisingfourcarparkingbasements, two market levels, two fashion levels, and a supermarket. Diversified entertainment facilitiesincludecinemasandgamesarcades;afamilyentertainmentzone;andfoodcourts,cafesandrestaurants.


Investment Portfolio

Tintoria International Shareholding 41.44%Sector/Industry Laundry and textile servicesLocation Dubai, UAE

TintoriaInternationaloperatesCleanSwift,aleadingindustriallaundryandtextileservicesproviderbasedinDubai.Operatingoutofanewstate-of-the-artfacilityinDubaiInvestmentPark,CleanSwifthasacapacityof45tonnesofhotellinenperday.Thefacilityutilisesleading-edgelaundryequipmentfromGermany,includingtunnelwashersthatreducewaterconsumptionby75Percentandextendthelifespanoflinen.Theplantalsoincorporatesabarrierwallconceptthatsegregatescleanandsoiledlinentoavoidcross-contamination,inlinewithWHOhygienestandards.

CleanSwift’sservicescoverroomlinen,towelling,guestlaundry,foodandbeverages,andstaffuniformsforaclientbaseofprimarily4-and5-starhotels,spasandrestaurants.TheCompanyhasbeenappointedastheexclusivelaundryprovidertotheOfficeofthePrimeMinisteroftheUnitedArabEmirates.CleanSwiftalsoofferslaboratoryfabrictesting,linenprocurementsupport,trainingforhotelhousekeepingstaff,andalinenleasingservice.

Open Silicon Shareholding 28.49%Sector/Industry TechnologyLocation USA, India and Taiwan

OpenSiliconisaleadingsemiconductorsolutionsprovider,specialisinginapplication-specificintegratedcircuit(ASIC)designandoutsourcedmanufacturingservices.TheCompanywasestablishedin2003bythefoundersofIntelMicroelectronics,asubsidiaryofIntel,tobringcost-effectiveness,predictabilityandreliabilitytotheASICmarket.OpenSilicondesignsandmanufacturescustommicrochips forcompaniesengaged incellularwireless, digital home appliances, computers, and network communications. Its services include productdefinition,designengineering,waferfabrication,packageandassembly,testengineeringandlogistics.

Based inSiliconValley,California, theCompanyhasdesigncentres invarious locationsacross theUSA,aswellas inTaiwanand India. Itsbluechipclients includeHP,Cisco,Sony,Fuji,PanasonicandHitachi.Sinceinception,OpenSiliconhascompletedover300designs,andshippedmorethan90millionchipswithareturnrateofonly0.0003Percent. TheCompany is currentlydeveloping specialisedASICs for clients involved inBitcoinmining.

Turquoise Coast Investment Company

Shareholding 4.48%Sector/Industry Real estate - residential and hospitalityLocation Bodrum, Turkey

TheTurquoiseCoastInvestmentCompanywasestablishedin2008toprovideinvestorswithanopportunityto capitalise on the strong demand for vacation homes in Turkey. The Company is developing a 23-acremixedhospitalityand residential realestatedevelopmentatBodrum,overlooking the turquoisewatersofKoyunbabaBay.WithahistorydatingbacktotheAncientGreeks,theBodrumPeninsulahasemergedasoneofthemostdesirabletouristdestinationsinTurkey,knowntodayastheMonteCarlooftheAegean.

Phaseoneoftheproject,comprisingluxuryresidencesforsale,hasbeencompleted.Phasetwo,whichisnowunderway,will includeahotelandspa,andthesecondtrancheofresidencesforsale.Phasethreewillseethecompletionofadditionalresidences.Comprehensiveamenitiesincludeaprivatebeach,swimmingpools,naturepathsandfunicularrailway,togetherwithseveralsignaturerestaurants.


Risk Management Review

RiskisaninherentpartofBankAlkhair’sbusiness;andtheBank’sabilitytoproperlyidentify,anticipate,assess,mitigateandactivelymanagerisksisacoreelementofitsoperatingphilosophyandprofitability.TheBank’sapproachtomanagingriskinvolvestheestablishmentofariskmanagementframeworkthatincludes:supportingriskgovernancearrangements;riskstrategy,approvedriskmanagementpolicies,limitsandprocesses; supporting the riskmanagement infrastructure; andan independent risk function.TheBank’s riskmanagementandgovernanceframeworkisintendedtoprovideprogressivecontrolsandcontinuousmanagementofthemajorrisksinvolvedintheBank’sactivities.

Developments in 2013ThekeyfocusduringtheyearwasonfurtherstrengtheningtheriskmanagementframeworkwithgreateremphasisonGroupoversight:

• The Board approved enhanced internal risk governance controls, granting the Risk Management function responsibility for preparinginvestmentperformancereportsindependentlyoffrontofficeanalysis.

• TheBank‘sMalaysiansubsidiary,Alkhair International IslamicBankBerhad,completedtheestablishmentoftheInternalCapitalAdequacyAssessmentProcess (ICAAP), in linewithBasel II requirements, and is in theprocessof integrating itwithinBankAlkhair’s development ofICAAP.

• PlanswerefinalisedtoenhancetheGroup’sbusinesscontinuityplanandinformationsecuritysystems.

Risk GovernanceBoard Risk Management OversightTheBoardofDirectorsisultimatelyresponsibleforriskmanagementoversight.Inrecognitionofthisresponsibility,theBoardRiskCommitteeprovidesexclusivefocusonriskmanagementissues.TheRiskManagementfunction,throughtheChiefRiskOfficer,reportsfunctionallyandadministrativelytotheBoardRiskCommittee.TheBoardisresponsibleforapprovingtheBank’sriskmanagementframework,riskstrategy,andriskappetitetoensureconsistencywiththeBank’slongtermobjectives.TheBoardisalsoresponsibleforsettingdelegatedauthoritylimits,andoverseeingtheBank’scompliancewiththem.

Audit CommitteeTheAuditCommitteeisappointedbytheBoardofDirectorsandconsistsoffourindependentnon-executiveBoardmembers.TheCommitteeassiststheBoardinfulfillingitsoversightresponsibilitieswithrespecttointegrityoffinancialreportingandtheunderlyingfinancial/operationalinternalcontrolsframework.TheCommitteeoverseestheInternalAuditandCompliancefunctions,inadditiontooverseeingtheExternalAuditprocess.

Shari’ah Supervisory BoardThe Group’s Shari’ah Supervisory Board is vestedwith the responsibility of ensuring that the Group complies with the Shari’ah rules andprinciplesinitstransactions,activitiesandgeneralphilosophy.

Senior Management Risk Oversight TheGroupRisk ExecutiveCommittee (REXCO) is the seniormanagement-level authority for overseeing risk and credit. TheCommitteehas theoverallresponsibilityforensuringthattheGroupdevelopsappropriateriskpoliciesandstrategiesfortherelevantbusinessactivities,andmakespreparationsforforthcomingregulatoryarrangementsinlinewithBaselCommitteerecommendations.ItoverseestheriskmanagementactivitiesoftheGroup;andreviewsandapprovesriskmanagementpolicies, limits,processesandprocedures. It isresponsibleforassessingfundamentalriskissueswithinthegeneraldevelopmentstrategyoftheGroup.

Internal Audit and Independent ReviewAllkeyoperational,financialandriskmanagementprocessesareauditedbyInternalAuditaccordingtoriskbasedauditingstandards.InternalAudit examines the adequacy of the relevant policies and procedures, and the Group’s compliance with internal policies and regulatoryguidelines.ItdiscussestheresultofallassessmentswithManagement,andreportsitsfindingsandrecommendationstotheAuditCommittee.InternalAuditrecommendationsaretrackedforresolutionviatheCommittee.



Risk Management Function TheRiskManagementfunction,headedbytheDirectorofRisk, isresponsiblefordesigningand implementingtheBank’sRiskManagementFramework, including risk strategy, policies, processes and systems. RiskManagement conducts independent risk assessments of strategicdevelopments,businessplans,productsandservices,and individualtransactions(includingtheirrespectivecredit, investment,counterpartyandoperationalrisks).ItisalsoresponsibleforensuringthattheBank’sprocessescaptureallsourcesoftransactionrisk;andthatappropriatelimitmethodologiesaredevelopedforuseinthemanagementofbusinessrisk.

Treasury ActivitiesTreasuryisresponsibleformanagingtheGroup’sday-to-dayfunding,liquiditymanagement,foreignexchangeandprofitrateexposures,subjecttoALCOsupervisionandRiskManagementmonitoring.

Investment Monitoring & ReportingProprietaryinvestmentrisksareidentifiedandassessedviaextensiveduediligenceactivitiesconductedbytherespectivedepartments.Post-acquisitioninvestmentmanagementisrigorouslyexercised,mainlyviaboardrepresentationwithintheinvesteecompany,throughoutthelifeofeachinvestmenttransaction.

Risk Policy Framework

Group Risk Strategy TheBank’sriskstrategydefinesriskappetiteintermsofbusinessgrowth,capitaladequacy,compliancewithregulatoryrequirements,returnonequity,businessstrategyandexposurelimits.AspartoftheBank’sriskstrategy,countriesareclusteredintocorecountries–thoseinwhich70%ofBankrevenuesaregenerated;networkcountries–mostlyperipheral;andextendedcountries–wheretheBanktakesanopportunisticview,butwithaverylimitedbusinessfocus.

TheriskstrategyformsacriticalpartoftheriskpolicyframeworkfortheBank,iscontinuouslyreviewedandupdatedinlinewithchangesinthebusinessstrategy.AdditionalinformationisavailableinNote23totheConsolidatedFinancialStatementsonpageno.79and80.

Risk Management ProcessTheBankhasestablishedanumberofsupportingriskpoliciescoveringcreditrisk,operationalrisk,largeexposure,liquiditymanagementandoutsourcingrisk.Thepoliciesaresubjecttoreviewandupdateonaperiodicbasis.

Basel II and Capital ManagementIn 2012, the Bank‘s Malaysian subsidiary, Alkhair International Islamic Bank Berhad, completed the establishment of the Internal CapitalAdequacyAssessmentProcess(ICAAP),inlinewithBaselIIrequirements;andisintheprocessofintegratingitwithinGroup’sdevelopmentofICAAP.TheBank’sBaselIIeffortsareledbytheRiskManagementfunctionundertheauspicesoftheGroupRiskCommittee.

Risk ExposureTheGroup’smainriskexposurecategoriesareinvestment,credit,liquidity,marketandoperationalrisk.InformationabouttheGroup’sexposuretoeachoftheserisks,itsobjectives,policiesandprocessesformeasuringandmanagingrisk,andtheBank’smanagementofcapital,isexplainedinNotes24to27and34totheConsolidatedFinancialStatementsonpages81to85and90.

Capital StructureBankAlkhairisrequiredtocomplywiththeregulatorycapitaladequacyguidelinespromulgatedbytheCBB,basedonthestandardsestablishedbytheBaselCommitteeonBankingSupervision(theBaselCommittee)oftheBankforInternationalSettlements(BIS).InaccordancewithCBBguidelines,BankAlkhairmustmaintainaminimumtargetcapitaladequacyratioof12.5%onaconsolidatedbasis.



ThefollowingtabledetailstheregulatorycapitalresourcesforBankAlkhairasattheendof2013,2012and2011,forTier1andTier2capital.

Composition of Capital


201331 December

201231 December

2011

Tier1capital

Paid-upsharecapital 207.9 207.9 207.9

Statutoryreserve 0.6 0.3 0.3

(Accumulatedloss)/retainedearnings (29.8) (32.7) 4.2

Otherreserves (9.5) (8.4) (8.7)

Non-controllingInterest - - (0.2)

Less:goodwill* (32.0) (36.0) (37.7)

Less:unrealisednetfairvaluelossesoninvestmentsecurities - - (0.2)

Less:50%ofsignificantminorityinvestmentsinbanking,securitiesandotherfinancialentitiesunlesspro-rataconsolidated

(10.8) (9.5) (9.4)

Less:50%ofinvestmentininsuranceentitygreaterthanorequalto20% (6.5) (6.4) (4.8)

Less:excessamountsovermaximumpermittedlargeexposurelimits (18.6) (3.9) (7.1)

Less:additionaldeductionfromTier1toabsorbdeficiencyinTier2capital (35.9) (19.8) (21.3)

Total qualifying Tier 1 capital 65.4 91.5 123.0

Tier 2 capital

Less:50%ofsignificantminorityinvestmentsinbanking,securitiesandotherfinancialentitiesunlesspro-rataconsolidated

(10.8) (9.5) (9.4)

Less:50%ofinvestmentininsuranceentitygreaterthanorequalto20% (6.5) (6.4) (4.8)

Less:excessamountsovermaximumpermittedlargeexposurelimits (18.6) (3.9) (7.1)

AdditiontoTier2toabsorbTier2capitaldeficiency 35.9 19.8 21.3

Total qualifying Tier 2 capital - - -

Total eligible regulatory capital 65.4 91.5 123.0

*Goodwill mainly relates to acquisition of BFC Group Holdings Ltd., and is considered only for capital adequacy calculation purposes.

Capital ManagementBankAlkhairB.S.C.(c)(“theBank”)isaclosed,unlistedcompanyincorporatedintheKingdomofBahrainandlicensedasaWholesaleIslamicBankbytheCentralBankofBahrain(CBB).IthassubsidiariesintheKingdomofSaudiArabia,Malaysia,TurkeyandJordan.TheBankalsohasassociatedundertakingsintheUnitedArabEmirates,PakistanandBahrain.TheBankalongwithitssubsidiariesaretogetherreferredtoas(“theGroup”).

BankAlkhair’scapitaladequacypolicyistomaintainastrongcapitalbasetosupporttheBank’sfinancialposition.Currentandfuturecapitalrequirementsaredeterminedonthebasisofbusinessgrowthexpectationsforeachbusinessline;futuresourcesandusesoffunds,includingseedcapitalrequirements;andexpectedsell-downandplacementtargets,andtheBank’sfuturedividendpolicy.

Thefollowingtablesdetailtherisk-weightedexposures,regulatorycapitalrequirementsandregulatorycapitalratiosforBankAlkhairB.S.C.(c)(theGroup)asattheendof2013,2012and2011.ThefiguresarebasedontheBaselIIstandardisedapproachforcreditriskandmarketrisk,andtheBaselIIbasicindicatorapproachforoperationalrisk.TheBankconsidersStandard&Poor’s,FitchandMoody’stobeExternalCreditAssessment Institutions (ECAIs) for theriskweightingofbalancewithbanks,placementwithfinancial institutions,financingreceivablesandinvestment inSukuk. If therearetwoassessmentsavailablebyeligibleECAIschosenbytheBankwhichmap intodifferentriskweights,thehigherriskweightwillbeapplied.IftherearethreeassessmentsavailablebyeligibleECAIschosenbytheBankwhichmapintodifferentriskweights, theassessmentscorrespondingtothetwo lowestriskweightswillbereferredto,andthehigherof thosetworiskweightswillbeselected.



TheBankusestheStandardisedApproachforallocatingcapitalforcreditriskandconsequentlyusesthesameapproachforallocatingcapitalforcounterpartycreditrisk.TheBankdoesnotdealwithfinanceorholdsecuritiesonbehalfofHighlyLeveragedInstitutions(HLIs)asdefinedbytheBaselCommitteeonBankingSupervision(BCBS).TheBank’smethodologyandapproachforestablishingandapprovingcounterpartyandcreditlimitsisbasedonanextensivereviewandanalysisofacounterparty’sfinancialconditionandperformance,tradinghistory,duediligencecoveringlicensing,regulatoryoversightandanti-moneylaunderingcompliancereview–toolswhicharealldesignedtoexcludeHLIs.

BankAlkhair’s treasury counterparts are fully licensed and regulated financial institutions. In addition, the Bank has developed an internalratingmethodologywherecounterpartiesareratedandassignedaninternalratingmappedtogradesprovidedbyexternalratingagencies.Theinternalcreditratingmethodologyhasstrengthenedthecounterpartyriskmanagementprocessbyprovidingamoreobjective,risk-basedanddeeperanalysisofcounterpartyfinancialconditionsandperformance.Beforeestablishinglimits,allcounterpartiesundergoathoroughcreditriskassessmentandduediligencereviewbeforeapprovalbytheRiskCommittee.

Aspartofitscollateralmanagementpolicy,theBankonlyacceptscollateralinlinewithShari’ahrequirements,andwithaviewtominimisingriskexposure.TheBankalsomanagesitscollateraltominimisecollateralconcentrationriskeitherbyspecificissuer,marketorinstrument.TheGroup’scollateralisnotconsideredaseligiblecollateralforcreditriskmitigationtechniques.

TheBank’screditpolicydefinestheapproachtobeusedwhendeterminingprovisions,dependingonthenumberofdaysoutstandingandthecreditriskrating.Facilitieswhererepaymentsofprincipaland/orprofitchargeshavebeenoutstandingformorethan90daysareclassifiedasnon-performing.Allfacilitiesgradedasnon-performinghavebeenprovidedfor.Generalprovisionsareassessedandcalculatedonaportfoliobasis if it isdeterminedthataportfoliooffacilitiesisaffectedbycommonriskfactorsthatarelikelytoincreasethecollectiveprobabilityofdefaultonthosefacilities.Specificprovisionsarecalculatedonafacility-by-facilitybasisafterincorporatingthevalueofrealisablecollateralnetofanydisposalcosts.

Credit Risk-Weighted Exposures UndertheCBBstandardisedapproach,creditriskexposuresareassignedtooneoffourteenstandardportfoliosasshownbelow,risk-weightedaccordingly.

Risk-weighted equivalents Risk-weightings


201331 December

201231 December

2011

Claimsonsovereigns - 0.5 0.9 0%-100%

ClaimsonPSEs* 0.4 0.4 0.4 20%

Claims on banks 43.7 41.8 47.9 20%-100%

ClaimsoncorporatesincludingTakafulcompanies&category3investmentfirms

62.4 110.3 133.9 100%

Investmentsinsecuritiesandsukuk:

Investmentsinlistedequities 20.6 23.7 24.8 100%

Investmentsinunlistedequities 38.1 42.6 56.9 150%

Investmentsinunratedfunds 41.0 38.1 43.0 100%-150%

Realestateholdings 98.3 38.5 38.5 200%

Otherassetsandspecialisedfinancing 21.0 20.0 23.4 100%

Credit risk-weighted assets 325.5 315.9 369.7

*Public sector entities (PSEs)

Minimum Capital Requirements for Islamic Financing Contracts

31 December 2013 31 December 2012

(US$millions)Risk-weighted

equivalents

Minimum capital

requirementsRisk-weighted

equivalents

Minimumcapital

requirements

Murabaha 59.7 7.5 90.4 11.3

Wakala 4.4 0.6 9.1 1.1

Mudaraba 19.6 2.5 17.9 2.2



Market Risk-Weighted ExposuresMarketriskistheriskthatthefairvalueorfuturecashflowsoffinancialinstrumentswillfluctuateduetoadversechangesinprofitrates,foreignexchangerates,equityandcommodityprices.UndertheCBBstandardisedapproach,marketriskexposuresarecalculatedforthefivecategoriesshowninthetablebelow.Apartfromlimitedforeignexchange,whichismainlytransaction-driven,andlong-termforeigncurrencyexposureonprivateequityinvestments,theBankhaslimitedexposuretoshort-termmarketrisks.

ThedetailsoftheGroup’smarketriskcapitalchargesandtheequivalentmarketrisk-weightedexposuresasattheendof2013,2012and2011,areasfollows:


201331 December

201231 December

2011

Price risk - - -

Equitypositionrisk - - -

Sukukrisk - - -

Foreign exchange risk 2.5 3.0 3.4

Commoditiesrisk - - -

Total capital requirement for market risk 2.5 3.0 3.4

Multiplier 12.5 12.5 12.5

Total Market risk-weighted exposures 31.3 37.5 42.5

ThedetailsoftheGroup’smaximumandminimumvalueforeachcategoryofthemarketriskduringtheyearsended31December2013and2012are:

31 December 2013 31 December 2012

(US$millions)Maximum Capital

Charge Minimum Capital

Charge MaximumCapital

Charge MinimumCapital

Charge

Price risk - - - -

Equitiespositionrisk - - - -

Sukukrisk - - - -

Foreign exchange risk 5.2 2.5 3.3 3.0

Commoditiesrisk - - - -

Total capital requirement for market risk 5.2 2.5 3.3 3.0

Multiplier 12.5 12.5 12.5 12.5

Total Market risk-weighted exposures 65.0 31.3 41.3 37.5

Operational Risk Operational risk is theriskofunexpected lossesresultingfrominadequateor failed internalcontrolsorprocedures,systemsfailures, fraud,business interruption, compliance breaches, human error,management failure and or inadequate staffing. The Bank has a policy in placewhichoutlinestheBank’sapproachinthemanagementofoperationalrisk, includingtheappointmentofdepartmentalRiskChampions,themappingofkeyprocesses;andestablishmentofKeyRiskIndicators(KRI’s)usedformonitoringoperationalrisksthroughRiskandControlSelfAssessments(RCSAs).

To support a robust internal control environment, theRiskManagement function is actively involved in oversight of key control processesincludingexposureandlimitmonitoring.Inaddition, italsoindependentlyreviewspaymentauthorisationandcontrolarrangements,Nostroaccount reconciliations, new product proposals, new counterparty limit proposals, new commodity broker proposals, and key changes ininternalprocesses.

ForselectedmaterialoperationalriskswheretheBank’scapacitytofullymitigateriskislimited,Takafulinsurancecontractsareusedtotransfersuchriskstothirdparties.KeyriskswhereTakafulinsurancecontractsareusedincludeprofessionalindemnityliability,propertyrisksandthirdpartyliability.


Operational Risk-Weighted ExposuresForthepurposesofcalculatingregulatorycapitalforoperationalriskunderBaselII,theBankusestheBasicIndicatorApproachwheregrossincome(weightedbyanalphaof15%)isusedasaproxyforoperationalriskcapital.ThedetailsofBankAlkhair’soperationalriskcapitalcharge,andtheequivalentoperationalrisk-weightedexposures,asattheendof2013,2012and2011,areshownbelow:


201331 December

201231 December

2011

Grossincome 53.6 17.8 45.6

Averagegrossincomeforthreeyears 39.0 27.7 83.1

Alpha 15% 15% 15%

Capital charge for operational risk 5.9 4.2 12.5

Multiplier 12.5 12.5 12.5

Total operational risk-weighted exposures 73.8 52.5 156.3

Risk-Weighted ExposuresRisk-weightedexposuresincreasedbyUS$24.7million(6.1%)in2013,fromUS$405.9millionasat31December2012toUS$430.6millionasat31December2013,asdetailedbelow:


201331 December

201231 December

2011

Creditrisk-weightedexposures 325.5 315.9 369.7

Marketrisk-weightedexposures 31.3 37.5 42.5

Operationalrisk-weightedexposures 73.8 52.5 156.3

Total risk-weighted exposures 430.6 405.9 568.5

Group StructureTheGroup’sfinancial statementsarepreparedona full consolidationbasis,withall subsidiariesbeingconsolidated inaccordancewith theFinancial Accounting Standards issued by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI). For capitaladequacypurposes,allsubsidiariesareincludedwithintheGroupstructure.However,theCBB’scapitaladequacymethodologyaccommodatesbothfullandpro-rataformsofconsolidation.

Theprincipalsubsidiariesandassociates,aswellasthetreatmentforcapitaladequacypurposes,areasfollows:

Domicile Ownership Regulatory treatment

Subsidiaries

AlkhairInternationalIslamicBankBerhad Malaysia 100% FullConsolidation

AlkhairCapitalMenkulDegerlerA.S. Turkey 91.9% FullConsolidation

AlkhairCapitalSaudiArabia KingdomofSaudiArabia 53.4% Pro-rataConsolidation

Al-TajamouatforTouristicProjectsCoPlc Jordan 50.6% RiskWeighting

Associates

BFCGroupHoldingsLtd. UnitedArabEmirates 43.36% Pro-rataConsolidation

BurjBankLimited Pakistan 37.91% FullDeduction

t’azurCompanyB.S.C.(c) Kingdom of Bahrain 25.86% FullDeduction

On31May2013,theGroupacquiredanadditionalstakeof4.17%inAl-TajamouatforTouristicProjectsCoPlc(Taj),acompanylistedontheAmmanStockExchange,Jordan;andinwhichtheGroupalreadyowned46.46%,resultinginTajbecomingasubsidiary.(RefertoNote7totheConsolidatedFinancialStatementsonpageno.71).

There are no investments in subsidiaries that are treated as a deduction from the Group’s regulatory consolidated capital. There are norestrictionsonthetransferoffundsorregulatorycapitalwithintheGroup.




Capital Adequacy Ratio

CapitalRatios-Consolidated&Subsidiariesabove5PercentofGroupRegulatoryCapital

(Percent)31 December

201331December

201231December

2011

Total Capital Ratio

Tier 1 Capital Ratio

TotalCapital Ratio

Tier1Capital Ratio

TotalCapital Ratio

Tier1Capital Ratio

BankAlkhairB.S.C.(c)(Group) 15.2 15.2 22.6 22.6 21.6 21.6AlkhairInternationalIslamicBankBerhad* 38.5 38.1 23.7 23.7 24.3 24.3

AlkhairCapitalSaudiArabia 47.7 47.7 77.5 77.5 93.2 93.2

AlkhairCapitalMenkulDegerlerA.S. 41.8 41.8 44.6 44.6 41.0 41.0

* Computed based on local regulatory requirements where entity operates.

TheminimumconsolidatedcapitalrequiredbyBankAlkhairtomaintaincomplianceat12.5%isshowninthetablebelow.


201331December

201231December

2011

Credit risk 40.7 39.5 46.2

Marketrisk 3.9 4.7 5.3

Operationalrisk 9.2 6.6 19.5

Total capital requirements 53.8 50.8 71.0

TheminimumcapitalrequiredbyBankAlkhairtomaintaincomplianceat12.5%forequitytypeinvestmentsisshowninthetablebelow.


201331December

201231December

2011

Investmentsinlistedequities 2.6 3.0 3.1

Investmentsinunlistedequities 4.8 5.3 7.1

Investmentsinunratedfunds 5.1 4.8 5.4

Total capital requirements 12.5 13.1 15.6

Credit RiskCreditriskistheriskthattheGroupwillincuralossofprincipalorprofitearnedbecauseitscustomers,clientsorcounterpartiesfailtodischargetheir contractual obligations; and arises principally from theGroup’s balanceswith banks, placementswith financial institutions, financingreceivables,investmentsecurities,Sukukandotherreceivables.CapitalMarketsproposeslimitsforitsinterbankplacementactivitiesandotherclientgroupsforreviewandapprovalbyRiskCommittee.Further,RiskManagementindependentlyanalysestheapplicationsandratesfortherespectivecounterparties.Basedonthis,anindependentrecommendationisforwardedtotheRiskCommitteeforapproval.TheCommitteeperiodicallyreviewstheselimitsforappropriatenessinprevailingmarketconditions.


Gross and average credit riskThetablebelowshowstheaveragegrosscreditriskexposureoftheBankasat31December2013,classifiedasperthedisclosureinthefinancialstatements:

Balance sheet items

(US$millions)Funded

exposureUnfundedexposure

Total gross creditexposure

Average grosscredit exposure*

Balances with banks 15,817 - 15,817 17,644

Placementswithfinancialinstitutions 74,390 - 74,390 67,973

FinancingReceivables 52,309 - 52,309 81,367

Investmentsecurities-Sukuk 13,775 - 13,775 16,488

Other assets 4,479 - 4,479 11,111

160,770 - 160,770 194,583

Guarantees - 5,311 5,311 4,512

Financing commitment - 500 500 1,833

Total credit risk exposure 160,770 5,811 166,581 200,928

* Averagegrosscreditexposureshavebeencalculatedbasedontheaverageofbalancesoutstandingonaquarterlybasisduringtheyearended31December2013.

Risk concentration of the maximum exposure to credit riskConcentrationofrisksismanagedthroughtheestablishmentofexposurelimitsforcounterpartiesandgeographicalregions,andbyindustrysectors.TheBank’sLargeExposurePolicydetailsconcentrationlimitsperobligor,groupsofconnectedobligors,sector,geography,countriesand groups of countries. Themaximum credit exposure to any one client or counterparty as of 31 December 2013was US$100.9million (31December2012:US$99.8million).Forlargeexposurepurposes,theBank’sinvestmentsalsofallunderthedefinitionofobligor.

Exposuresinexcessofthe15Percentlimitfortheyearended31December2013areasfollows:

Counterparties

Amount of exposures

In US $ thousands

% of exposure

To capital Type of Exposures

Counterparty#1 100,909 98.33% InvestmentandMurabaha

Counterparty#2 50,300 49.01% Investmentandreceivable

Counterparty#3 39,239 38.23% Mudarabaandbankbalance

Counterparty#4 26,345 25.67% Investment,receivableandguarantee

Counterparty#5 24,846 24.21% Investmentandreceivable

Counterparty#6 21,543 20.99% Investmentandbankbalance

Counterparty#7 15,405 15.01% Investment,Murabahaandreceivable

TheexposuretoCounterparty#3isanexemptedshort-terminterbankexposure.

Credit quality per class of financial assets

Specific provisions

Specific Provision against

(US$thousands) Financing Receivable Other Assets Investment Securities Total

At the beginning of the year - 3,768 - 3,768

Newprovisionmade 2,974 297 - 3,271

Writeoff - (859) - (859)

Recoveries/write-backs - (1,304) - (1,304)

Balance at the year-end 2,974 1,902 - 4,876

In2013,theGroupmadegeneralcollectiveprovisionsofUS$0.05million(2012:US$0.25million)againstitsFinancingReceivables.ThespecificprovisionofUS$2.97millionagainsttheFinancingReceivablewasmadeinMalaysia.TheremainingspecificprovisionsweremadeinBahrain.




Liquidity Risk Management

Liquidity risk is the risk that theGroupwill not be able tomeet its current and future cash flow and collateral needs, both expected andunexpected,withoutmateriallyaffectingitsdailyoperationsoroverallfinancialcondition.

ThekeyfeaturesoftheGroup’sliquiditymethodologyare:

• The Group Asset and Liability Committee (ALCO) is responsible for liquidity monitoring, cash flow planning, and general asset liabilitymanagement.

• InaccordancewiththeBaselrecommendationsonliquiditymanagement,theGroupmeasuresliquidityaccordingtotwocriteria:“normalbusiness”,reflectingday-to-dayexpectationsregardingthefundingoftheGroup;and“crisisscenario”,reflectingsimulatedextremebusinesscircumstancesinwhichtheGroup’ssurvivalmaybethreatened.

• TheGroup’s liquiditypolicy is toholdsufficient liquidassets tocover itscommittedstatementoffinancialpositionrequirements,plus itsbudgetedexpensesfortheliquidityhorizon,anditsforecastinvestmentcommitmentsovertheliquidityhorizon.

ThefollowingarethekeyliquidityratioswhichreflecttheliquiditypositionoftheGroup.

31 December 2013

31 December 2012

Liquidassets:Totalassets 16.6% 22.1%

Liquidassets:Totaldeposits 38.7% 44.2%

Liquidassets:Totalliabilities 27.4% 39.7%

Shorttermassets:Shorttermliabilities 103.8% 97.4%

Prepayment RiskPrepaymentrisk istheriskthattheGroupwill incurafinancial lossbecause itscustomersandcounterpartiesprepayorrequestrepaymentearlierthanexpected.TheGroupisnotexposedtoanysignificantprepaymentrisk.

Earnings and Expenses Prohibited by Shari’ahTheGroupdidnotreceiveanysignificantincomeorincursignificantexpensesthatwereprohibitedbyShari’ah.Duringtheyear,BankAlkhairrecoveredUS$11,387.74(31December2012:US$454,022.44)fromaclienttowardslatepaymentchargesonafinancingfacility.ThishasbeenallocatedbytheShari’ahBoardtoregisteredcharities.

Restricted Investment AccountsBank Alkhair offers Restricted Investment Accounts (RIAs) to both financial and non-financial institutions. All RIA offering documents arepreparedandissuedwithinputfromthebusinesslinesandShari’ahAssurance,FinancialControl,LegalandRiskManagementdepartments,toensurethatallinvestorshavesufficientinformationtoconsiderallriskfactorsallowingthemtomakeaninformeddecision.TheBankhasclearguidelinesandproceduresforthedevelopment,managementandriskmitigationofitsRIAs.TheBankhasestablishedarobustoperationalandfunctionalinfrastructuretoensurethateffectiveinternalcontrolsystemsareinplace,andthatRIAholders’interestsareprotectedatalltimes.TheBankisfullyawareofitsfiduciarydutiesandresponsibilitiesinmanagingRIAs.

Total Income from RIA

(US$thousands)31 December

201331 December

201231 December

201131 December

201031 December

2009

GrossIncome 15 91 758 4,931 188

WakilFee (3) (36) (215) (956) (56)

Displaced Commercial RiskTheBankdoesnothaveProfitSharingInvestmentAccounts(PSIAs)andisnotexposedtodisplacedcommercialrisk.


Corporate Governance Review

OverviewAsaBahrain-basedbank,BankAlkhairissubjecttothecorporategovernancestandardsoftheCentralBankofBahrain(CBB)andtheBahrainCommercialCompaniesLaw.TheBankaspirestothehigheststandardsofethicalconduct,whichisbasedonsoundcorporategovernance.Inaccordancewithitscommitmenttobothmeetinglegalandregulatoryrequirementsandadheringtointernationalbestpractices,BankAlkhairhasputinplaceacomprehensiveCorporateGovernanceframeworktomaximiseoperationalefficiencyandprotectshareholders’rights.BankAlkhairregardstheguidingprinciplesofitsCorporateGovernanceframeworktobefairness,transparency,accountabilityandresponsibility.

Developments in 2013During2013,BankAlkhairensuredcompliancewiththerobustCorporateGovernanceframeworkestablishedin2011.Developmentsduringtheyearinclude:

- HeldElectionsforBoardMembership,andfurtherincreasedthesizeoftheBoardfromeleventofifteenmembersinordertoimprovethediversityandexperienceoftheBoard;whereineightnewmembersjoinedtheBoardandsevenexistingBoardmemberswerere-elected.

- ConductedaninductionsessionforallBoardmembers,includingin-housetrainingbyallHeadofDepartments,andasummarytoupdateallmembersontheBank’sprofile,mission,visionandstrategy.

- EnhancedtheBank’sorganisationstructure.- ConductedathoroughPerformanceEvaluationoftheBoard,itsmembersanditssub-committees,andhighlightedareastobestrengthenedinordertoenhancetheBoardofDirectors.

Governance and Organisation Structure

ChiefExecutiveOfficer

Board of Directors

Shareholders

ExecutiveCommittee

Nomination,Remuneration&

GovernanceCommittee

RiskCommittee

AuditCommittee

GroupInternalAudit

RiskManagementOperations&Administration

InvestmentBankingGroup

SpecialProjectsTreasuryHRFinanceLegal IT

Turkey

Malaysia

KSA

Shari’ahAssurance

Shari’ahSupervisoryBoard

Legend

ReportingLineTwoWayCommunicationLine

AML



Ownership Structure

Ownership by nationality

Nationality No. of Shares No. of Shareholders Percentage (%)

SaudiArabian 150,864,544 46 72.55%

Kuwaiti 38,099,800 35 18.32%

Bahraini 5,762,532 30 2.77%

Cayman Islands 4,576,703 1 2.2%

Qatari 3,456,006 3 1.66%

Others 5,202,329 56 2.5%

Ownership by percentage of equity

Class of Equity No. of Shares No. of Shareholders Percentage (%)

Lessthan1% 32,082,281 151 15.43%

1%tolessthan5% 120,519,831 15 57.95%

5%tolessthan10% 55,359,802 5 26.62%

Ownership of directors and senior management

Name PositionPercentage (%) as of

31 December 2013

YousefAbdullahAl-Shelash Chairman 5.55%

SultanAbdulrahmanAbalkheel Director 5.55%

AbdullatifAbdullahAl-Shalash Director 5.18%

HethloulSalehAl-Hethloul Director 5.18%

Ahmed Saleh Al Dehailan Director 4.99%

MajedAlQassem Director 4.81%

KhaledAbdulrahim Director 0.44%

IkbalHajiKarimDaredia ChiefExecutiveOfficer,AlkhairMalaysia 0.04%

AyhamYousefGharaibeh GeneralCounsel 0.02%

MuhammadAl-BashirMuhammadAl-Amine Head of Shari’ah 0.01%

Ownership above 5%

NamePercentage (%) as of

31 December 2013

YousefAbdullahAl-Shelash 5.55%

SultanAbdulrahmanAbalkheel 5.55%

AbdullatifAbdullahAl-Shalash 5.18%

HethloulSalehAl-Hethloul 5.18%

FahadAbdulazizAl-Sekait 5.18%

No shares were traded by the Bank’s directors during the year.



Board of DirectorsBank Alkhair’s Board of Directors is responsible for supervising themanagement of the Bank’s business and its affairs, and protecting andstrengtheningtheBank’sassetsintheinterestofallshareholders;whileoverseeingthecorporategovernancefunctiontoensurethehigheststandards of transparency and accountability. The Board’s responsibilities include:• Causingfinancialstatementstobepreparedaccuratelyandapprovingthem;• RegularlyreviewingtheBank’sprocesses,risklevelsandcontrolframeworktoensuretheBank’sadherencetotheCentralBankofBahrain’s

regulations;andpromotingandachievingsustainableperformanceandlong-termgrowthinshareholders’value;• ApprovingandoverseeingtheimplementationoftheBank’sstrategies,objectivesandplans;• Ensuringthattheinterestsofallstakeholdersareconsidered;• OverseeingtheaccuracyandcomplianceoftheBank’scorporategovernanceguidelineswiththeCentralBankofBahrain’sHCModule,aswell

astheCodeofCorporateGovernance;and• Providingstrategicleadership,andsettingvaluesandstandardsfortheBank.

The Board comprisesmembers from diverse backgrounds,who combine a broad spectrum of experience and expertisewith a reputationfor integrityandprofessionalism.ThecurrentBoardcomprisesfifteenmembers,nineofwhomare independentnon-executivedirectors, inaccordancewiththerequirementsofBahrain’sCodeofCorporateGovernance.AspartoftheBank’sCorporateGovernanceframework,theBankintroducedformalBoardprocedures,includingtheinductionandtrainingofnewmembers,andcontinuousdevelopmentandtrainingofexistingmembers.TheBoard,theBoard’sCommittees,andeachindividualdirectormustundergoaformalperformancereviewandevaluationasrequiredbytheCode.

During2013,Boardnominationsandelectionswereheld,whereineightnewboardmembers joinedtheexistingsevenmemberswhowerere-elected,addingtothesizeandexperienceoftheBoardofDirectors.AninductionprogrammewasalsotailoredforthenewandexistingboardmemberstobetterfamiliarisethemwiththeBank’sprofile,missionandstrategy.

TheelectionandterminationofdirectorsisgovernedbytheBahrainCommercialCompaniesLawandtheBank’sArticlesofAssociation,whichrequiretheelectionofdirectorsbywrittenballot.TheBoardtermformembersisthreeyears.Boardmembersmustmeetandattendatleast75%ofallBoardmeetingswithinacalendaryear.BiographiesofcurrentdirectorsarelistedattheendofthisReview.

Material transactions that need Board approvalCredit and Investment applications exceeding certain pre-defined exposure levels require approval of the Board. Similarly, related partytransactionsrelatingtomembersoftheBoardrequireapprovaloftheBoard.

Board Composition

No.ofmembers 15non-executivemembersofwhichnineareindependentdirectors

CommitteeMembership PleaserefertotheBoardofDirectors’biographiesattheendofthisReview

Minimumno.ofmeetingsperyear 4

Quorum 8

Board of Directors Meeting Attendance - 2013

Members 28 February 9 May 27 June 22 August 12 December75% & Above Attendance for All Meetings

YousefAl-Shelash

HethloulAl-Hethloul

AbdullatifAl-Shalash

AymanAbudawood

Dr.AhmedAl-Dehailan

Dr.AbdulazizAlOrayer

Khalid Shaheen

MajedAlQasem* N/A N/A

SultanAbalkheel* N/A N/A

WaleedAlasfoor* N/A N/A N/A

AliAl-Othaim* N/A N/A N/A

AbdullahAlDubaikhi* N/A N/A N/A

AbdulrazaqAl-Wohaib* N/A N/A N/A

Dr.KhalidAteeq* N/A N/A N/A

KhaledAbdulrahim* N/A N/A N/A

*electedon27June2013


Board CommitteesBankAlkhair’sBoardofDirectorsisassistedbyfourBoardCommittees:theAuditCommittee,theNomination,Remuneration&GovernanceCommittee,theExecutiveCommittee,andtheRiskCommittee.

Audit CommitteeTheAuditCommittee isresponsibleforassistingtheBoard in itsoversightofstatutoryaffairsrelatingtoaccountingandfinancialreporting;internalcontrolsystems;internalandexternalaudit;andcompliancewithShari’ahandregulatorylawsandregulations.

No. of members 4 non-executive members, 3 of whom are independent directors

Members of the Committee • Dr.AhmedAlDehailan(Chairman)

• AbdullahAlDubaikhi

• SultanAbalkheel

• AliAl-Othaim

Independent

Independent

Independent

Non-executive

Minimum no. of meetings per year Four

Quorum Two

The Audit Committee’s primary responsibilities include:

• EnsuringtheintegrityoftheBank’sfinancialstatements,financialreportingprocessandinternalaccountingandfinancialcontrolsystems;

• Approvingtheappointmentoftheinternalauditorandreviewingtheactivitiesoftheinternalauditfunction;

• ConductinganannualindependentauditoftheBank’sfinancialstatements;• RecommendingtotheBoardtheengagementofexternalauditorsfornon-auditservicesandevaluatingtheexternalauditors’independenceandperformance;

• OverseeingtheBank’scompliancewithlegalandregulatoryrequirements,includingtheBank’sdisclosurecontrolsandproceduresandcompliancewiththeBank’sCodeofConduct;and

• OverseeingtheBank’sriskprofileandriskappetite.

Meeting Attendance – Audit Committee, 2013

Members 27 February 8 May 7 November 11 December

Dr.AhmedAl-Dehailan

AdelAl-Saqabi N/A N/A

Bader Kanoo N/A N/A

AliAl-Othaim N/A N/A

SultanAbalkheel N/A N/A

AbdullahAlDubaikhi N/A N/A



Nomination, Remuneration & Governance Committee TheNomination,Remuneration&GovernanceCommittee(NR&GC)isresponsibleforassistingtheBoardinestablishinganimpartialnomination,selectionandremunerationprocessfordirectors,theCEOandexecutivemanagement.TheCommitteealsoassiststheBoardindischargingitsoversightresponsibilitiesinrelationtocorporategovernance,andcompliancewithlegalandregulatoryrequirementsandShari’ahrulesandprinciples.

No. of members Non-executive Directors, one of which is independent

Members of the Committee • YousefAl-Shelash

• HethloulAl-Hethloul

• Dr.AbdulazizAl-Orayer(Chairman)

• MajedAlQasem

Non-executive

Non-executive

Independent

Non-executive


Quorum Two

The NR&GC’s primary responsibilities include:

• OverseeingtheBoardofDirectors’andindividualdirectors’performance;• EnsuringtheBank’seffectivenessandcompliancewithcorporategovernancepoliciesandpractices;

• SuccessionplanningfortheBoardandseniormanagement;and• AssistingtheBoardinestablishingstaffremunerationpoliciesandfeesfornon-executivedirectorsandtheShari’ahSupervisoryBoard.

NR&GC Meeting Attendance - 2013

Members 28 February 9 May 27 June 22 August 12 December

YousefAl-Shelash

HethloulAl-Hethloul

Dr.AzizAlOrayer

MajedAlQasem N/A N/A N/A

Risk CommitteeTheRiskCommitteeisresponsibleforoverseeingtheriskmanagementframeworkoftheBank,andensuringthattheBank’smanagementtakeadequatestepstomonitorandmitigatetheBank’sriskexposures.Thisisanewly-formedcommitteeduringtheyear.

No. of members Four Non-Executive Directors, two of whom are Independent

Members of the Committee • MajedAlQasem(Chairman)

• AbdullatifAl-Shalash

• KhaledAbdulrahim

• Dr.KhalidAteeq

Non-executive

Non-executive

Independent

Independent


Quorum Two

The Risk Committee’s primary responsibilities include:

• OverseeingtheGroup’sriskpolicies,processesandinfrastructure(includingoperationalrisk)relatedmatters;and

• Supervisingthecreditapprovalandinvestmentreviewprocess.

Risk Committee Meeting Attendance -2013

Members 27 February 8 May 7 November 11 December

MajedAlQasem(Chairman) N/A N/A

AbdullatifAl-Shalash N/A N/A

KhaledAbdulrahim N/A N/A

Dr.KhalidAteeq N/A N/A



Executive CommitteeTheExecutiveCommitteeisresponsibleforreviewingspecificmattersdelegatedtoitbytheBoard,andmakingrecommendationsthereontotheBoard,ormakingdecisionsbasedonauthoritiesspecificallydelegatedtoitbytheBoard.TheCommitteealsoassiststheBoardinfulfillingitsoversightresponsibilitiesinrelationtostrategy,budget,financingplans,investmentsandoperations.TheCommitteealsohasthepowerandauthoritytoapproveinvestmentsandexpenditureuptoapre-approvedlimitspecifiedbytheBoard.

No. of members 5 members

Members of the Committee • YousefAl-Shelash(Chairman)• AymanAbudawood• Khalid Shaheen• AbdulrazaqAl-Wohaib• WaleedAlAsfoor

Non-executiveIndependentIndependentNon-executiveIndependent

Minimum number of meetings per year 2

Quorum 3

The Executive Committee’s primary responsibilities include:

• OverseeingtheBank’soperations,investmentandfinance-relatedmatters,aswellasassistingtheBoardinensuringandmaintainingoversightoftheBank’sriskmanagementsystemsandcontrolenvironment;

• ReviewingandproposingstrategicobjectivesoftheBanktotheBoard;• ReviewingandapprovingtheBank’sbusinessplansandensuringalignmentwiththeBank’sstrategicobjectives;

• Presentingtheannualfinancial,operationalandcapitalexpenditurebudgetstotheBoard;and

• EnsuringtheBankhasstrongriskmanagementandinternalcontrolsystemsinplace.

Executive Committee Meeting Attendance - 2013

Members 28 February 9 May 3 October 5 December

YousefAl-Shelash(Chairman)

HethloulAl-Hethloul N/A N/A

AbdullatifAl-Shalash N/A N/A

Ayman Boodai N/A N/A

AymanAbudawood

KhalilNooruddin N/A N/A N/A

Khalid Shaheen N/A N/A

AbdulrazaqAl-Wohaib N/A N/A

WaleedAlAsfoor N/A N/A

Shari’ah Supervisory BoardShari’ahcomplianceisthecornerstoneofBankAlkhair’soperations.Asix-scholarShari’ahSupervisoryBoardhasbeenestablishedtoprovideIslamicadviceandguidancetoensurethatallBankAlkhairactivitiescomplywithShari’ahlaw.ThemembersoftheShari’ahSupervisoryBoardareprominentIslamicscholarswhoarewell-versedininternationalfinancialmarkets,andhaveaproventrackrecordintheimplementationofShari’ahrulesandprinciplesinIslamicbanks,aswellasinproductdevelopmentandIslamicfinancestructuringtechniques.

TheBoardispro-activelyinvolvedinallproductdevelopmentandinvestmentdecisionsrelatingtotransactions;andallunderlyingcontractualdocumentation is only finalised after obtaining the approval of the Shari’ah Assurance division under the direct oversight of the Shari’ahSupervisoryBoard.TheShari’ahBoardsetsouttheIslamicopinions(Fatwas)whicharerequiredforapprovalofthestructuresofeachfinancialtransaction,serviceorinvestmentproduct.BiographiesoftheShari’ahBoardmembersarelistedattheendofthisreview.



Corporate Governance Policies and Procedures

Compensation of the Board of Directors, Shari’ah Supervisory Board and Executive ManagementCompensationoftheBoardofDirectorsandExecutiveManagementisrecommendedtotheBoardofDirectorsbytheNomination,Remuneration&GovernanceCommittee,andtheBoardofDirectorsthenmakestherecommendationtotheshareholdersattheannualgeneralmeeting.InlinewithCBBandMOICregulations,thetotalremunerationthattheBoardofDirectorsmayreceiveshallnotexceed5Percentofthenetprofitinanyonefinancialyearafterallowingforstatutoryreserves.

TheShari’ahSupervisoryBoardremunerationincludessittingfeesonly.

The ExecutiveManagement’s remuneration takes into consideration the performance of the Bank, as well as an assessment of individualmembers’ performance and responsibilities. Total Executive Management remuneration includes salaries, allowances, reimbursement ofexpenses,post-employmentbenefits,andperformance-relatedincentives.ExecutiveManagementmembersareentitledtoafixedremunerationasper theircontractualagreements,andanyotherperformance-related incentives/bonusesmustbeapprovedbytheBoard.Detailsof theaggregatecompensation(includingbenefits)fortheBoardofDirectorsandExecutiveManagementfortheyearended31December2013canbefoundinNote22totheFinancialStatementsonpageno.77and78.

Sound Remuneration Practices TheCBBissuednewregulationsregardingSoundRemunerationPractices,andtheBankwillensurefullcompliancewithallCBBguidelinesandMOIClawswithregardstocompensation.

Continuous Development of the Board and Board Committees

InlinewiththeBank’sBoardInductionandTrainingPolicy,aninductionprogrammewasconductedfornewmembersoftheBoardofDirectorsin2013.Theinductionprogrammecoveredgovernanceandfinancialinformation,anddirectorswereprovidedwithallBoard-relateddocumentsandpoliciesrelatingtotheBank.Furthermore,aspartoftheBoard’scontinuousdevelopment,Boardmembersattendedadetailedtrainingprogrammewhich included training and updates from the Head of all functions, including the CEO on the Bank’s profile; the CFO on theFinancefunction;theInvestmentTeamontheInvestmentfunction;theBoardsecretaryonCorporateGovernanceandtheBoard’srolesandresponsibilities;theRiskDirectorontheRiskfunction;theChiefComplianceOfficerontheCompliancefunction;theMLROontheAMLfunction;theHeadofInternalAuditontheInternalAuditfunction;andtheHeadofShari’ahontheShari’ahfunction.

Board Performance Evaluation BankAlkhairhasapolicyinplacetogoverntheannualreviewmechanismoftheBoard,theBoard’sCommittees,andeachindividualdirectoragainstspecificcriteria.BankAlkhair’sBoardofDirectorshasestablishedamechanismfortheannualperiodicreviewoftheBoardandeachofitsCommittee’sperformance.ThereviewevaluatestheBoardasawhole,andeachofitsCommitteesinthelightofitsstrategicobjectives,andaccordingly,eachDirector,includingtheChairman,issubjecttoaself-evaluation.

TheBoardandBoardCommitteeevaluationisfacilitatedbytheBoardSecretary,whoreportstheresultstotheNomination,RemunerationandGovernanceCommittee(NR&GC).TheNR&GCmayelecttohireanexternalconsultanttoevaluatetheeffectivenessoftheBoardandBoardCommittees.TheNR&GCpresentstheresultsoftheevaluationtotheBoard,andsubsequentlyreportstotheShareholdersduringthenextAGM.BoardEvaluationsfortheBoardofDirectors,itsmembers,anditsCommitteeswereconductedfortheyearending2013,andtheresultshavebeenreportedtotheNR&GC,andsubsequentlytotheBoardofDirectors,andreportedtotheshareholdersintheAGM.

Code of Conduct TheBoardofDirectorshasadoptedawrittencodeofethicalbusinessconduct,whichincludesthefollowing;• Honestyandobservance;• AvoidanceofconflictsbetweenpersonalinterestsandtheinterestsoftheBank;• Respectingconfidentialityofinformationobtainedduringthecourseofbusiness;• MaintenanceoftheBank’sreputation,andavoidanceofactivitieswhichmightreflectadverselyontheBank;• IntegrityindealingwiththeBank’sassets;• SettinghighpersonalstandardsandadheringtotheCodeofConduct;and• Keepingabreastofcurrentgoodpractices.

Conflict of Interest BankAlkhair has a formalConflict of Interest policywhich applies to all directors andemployees, including a signedundertaking requiringdirectors todisclose theirpersonal interestsannually.TheConflictof Interestpolicy requiresBoardmembers to informtheentireBoardofpotentialconflictsofinterestbetweentheBank’sactivitiesandtheirpersonalinterests,andabstainfromvotingonmattersrelatingtotheminaccordancewiththerelevantprovisionsoftheBCCL or any other Law.Noconflictsofinterestwereidentifiedandreportedin2013.



Related Party TransactionsTheBankhasanapprovalprocessinplaceforrelatedpartytransactions.TheapprovalprocessisreflectedintheBank’sGroupCodeofConductandCorporateGovernancePolicy.Inthisregard,theBankhascompliedwithArticle32(3)oftheBank’sArticlesofAssociationandArticle189oftheBahrainCommercialCompaniesLaw(CCL).TransactionsincludingrelatedpartytransactionswithamonetaryvaluebetweenUS$7millionandUS$25millionrequiretheapprovaloftheBoardExecutiveCommittee,andanytransactionaboveUS$25millionrequiresBoardapproval.DetailsofrelatedpartytransactionsaredisclosedinNote22oftheFinancialStatementsonpageno77and78.

Investor Complaints In order to strengthen and formalise the Investor complaints mechanism, Bank Alkhair has developed a policy for managing complaintsreceivedfrominvestors,alongwithaformalescalationstructuretoensurecomplaintsaredealtwitheffectivelyandefficiently.Forlogginganycomplaints,theInvestorComplaintsGuidelinesandescalationinformationisavailableontheBank’swebsite.

Whistle-blowing ProcedureBankAlkhairendeavourstooperateinaclimateoftransparency,andinordertostrengthenandencouragetransparency,hasaformalwhistle-blowingpolicyinplacetofacilitatetheescalationofemployees’concernsandsuspicionsofcriminalorunethicalconduct.

Shareholder CommunicationsBankAlkhairisdedicatedtomaintaininganopenlineofcommunicationwithitsstakeholders,andensurestransparentandaccurateinformationisdisclosed inaprofessionalandtimelymanner.Communicationwithshareholders isdisseminatedthroughseveralchannels, including thecorporatewebsite,theannualreport,theannualgeneralmeeting,andtimelyannouncementsinthelocalmedia.

Corporate Social Responsibility BankAlkhairiscommittedtoimprovingthewell-beingandqualityoflifeofcitizensoftheKingdomofBahrain.During2013,theBanksupportedanumberofcharitableorganisations,includingtheBahrainDisabledSportsFederation,AlEhsanCharityOrganisationandtheBahrainYoungLadiesAssociation. Inaddition,BankAlkhairprovidedfinancial support toneedy familiesand individuals,andotherdeservingcauses in thecommunity.

TheBankalsosupportsthedevelopmentofyoungBahrainisbyparticipatinginTamkeen’sEmploymentSupportScheme,withthejointgoalofprovidingBahraininationalswithworkexperienceopportunities,alongwithafinancialcontributiontowardstheirincomeandprofessionaltrainingfees.

As a prominent Shari’ah-compliant financial institution, Bank Alkhair supports the development of the Islamic banking industry throughprovidingfinancialsupportandparticipatinginmajorindustryconferencesandevents,includingtheannualWorldIslamicBankingConference.

Compliance with Regulatory Guidelines TheCentral BankofBahrain’s (CBB’s)High Level ControlsModule (HCModule),which focuseson strengthening the corporate governancefunctionofbanks,containsrulesthatmustbecompliedwith;andguidancewhichmaybecompliedwith;orincasesofnon-compliance,mustbedisclosedintheannualreportandexplainedtotheCBB.

Fortheyear2013,BankAlkhairisfullycompliantwiththerequirementsoftheCBB’sHCModule,exceptforthefollowing:

HC-1.4.6 recommends that the Chairman of the Board is an independent director. However, as the majority of the Board members areindependent,theindependenceofthedecision-makingprocessisnotcompromised.Furthermore,ofthefourBoardCommittees,theChairmenoftwoCommitteesareindependent,includingtheNominations,Remunerations&GovernanceCommitteeandtheAuditCommittee.TheBankalsohasaconflictofinterestpolicyaswellasadirectors’independencepolicyinplace,whichrequireBoardmemberstodeclaretheirpersonalinterestsonanannualbasis.

HC-1.3.4 requiresBoardmembers toattendat least75%ofallBoardmeetings inagivenfinancialyear.Unfortunately,due tounavoidablecircumstances,Mr.Abudawoodhasnotmetthisrequirement,andCBBwasnotifiedofthesame.

External Audit Fees and Services Thedetailsoftheauditfeeschargedandnon-auditservicesprovidedbytheBank’sexternalauditorswillbemadeavailabletotheshareholdersas andwhen requested. Such details will bemade available to the Bank’s shareholders as per their specific request, provided that thesedisclosuresdonotnegativelyimpacttheBank’sinterest.



Control Functions ComplianceBankAlkhairiscommittedtomeetingthehighestlevelsofethicalstandardsinallareasofitsoperations.TheBoardofDirectorswaskeentoestablishastrongandindependentCompliancedepartmenttoassisttheSeniorManagementoftheBankineffectivelymanagingitscompliancerisk. The Compliance department reports functionally to the Board of Directors, and is responsible for overseeing the Bank’s complianceprogramme.Itisresponsiblesolelyforcompliance-relatedissues,andfunctionsindependentlyfromotherbusinessactivities,includingthosewherethedepartment’sindependenceandobjectivitymaybecompromised.TheCompliancedepartmentisresponsibleforthemanagementofcomplianceriskattheGrouplevelfortheBankanditssubsidiaries,andforensuringthattheGroup’spolicies,proceduresandoperationsarein linewithallapplicablerulesandregulations. ItalsoassistsSeniorManagementineducatingstaffandincreasingawarenessregardingcomplianceissuesacrosstheGroup.

Anti-Money Laundering (AML)BankAlkhair’sAnti-MoneyLaunderingfunctionadministerstheauthorisationprocessbywhichtheBank’stargetsareapprovedaslegitimateclients,andthereaftercontinuestomonitorclientstoensureeffectivecompliancewiththerulesandregulationsasstipulatedintheCentralBankofBahrain’sFinancialCrimeModuleandinternationalbestpractices.ThishasbeenachievedthroughtheappointmentofadesignatedMoney Laundering ReportingOfficer and DeputyMoney Laundering ReportingOfficer; and the development of detailed AML policies andprocedures,andcomprehensiveKYCdocumentation,torigorouslyscreenpotentialinvestors’identitiesandsourceoffunds.

Shari’ah AssuranceBankAlkhair’sShari’ahAssurancedivisionworkscloselywiththeShari’ahSupervisoryBoard inthedevelopmentandpre-screeningofeverybusinessproposition,includingthoseoftheBank’ssubsidiariesandassociates.ThedivisionalsoplaysakeyroleinensuringthattheFatwasoftheShari’ahSupervisoryBoardareconsistentlyapplied,andpreparesquarterlyShari’ahauditreportsforreviewbytheBank’sShari’ahBoardandManagementteam.

TheShari’ahAssurancedivisionactivelymonitorsalltransactions,andformsanintegralpartoftheinvestmentprocessfromtheoutset.Itisalsoamemberof the InvestmentandPost-InvestmentManagementCommitteeandtheRiskCommittee.ThedivisionvalidatesallbusinesspropositionsagainstboththeShari’ahBoard’sresolutionsandAccountingandAuditingOrganisationforIslamicFinancialInstitutions(AAOIFI)standards.

Alltransactionsanddealingsduringtheyearended31December2013wereincompliancewiththerulesandprinciplesof IslamicShari’ah,exceptpartoftheinvestmentintheTajMallproject,OpenSiliconandTheIndependentforLogistics&Warehousing.However,theBankisintheprocessofrefinancingtheseprojectsusingShari’ah-compliantfinancing.In2013,BankAlkhairaccumulatedUS$658,324ofnon-Shari’ahincome,whichtheShari’ahSupervisoryBoardadvisedtheBanktodonatetoregisteredcharities,andsubmitthe listofbeneficiariestotheBoard.

Group Internal AuditGroup Internal Audit reports directly to the Board Audit Committee to provide independent and objective assurance over the adequacy,sustainabilityandeffectivenessoftheBank’sgovernance,internalcontrolsandriskmanagementprocesses.ItsscopeandrolehasbeendefinedandapprovedbytheAuditCommitteeintheformofanInternalAuditCharter.

ThedepartmentalsoconductsstrategicauditreviewsoftheBank’ssubsidiariesinTurkey,MalaysiaandSaudiArabia;andoverseestheinternalauditprocessint’azur–whichisanassociatedcompanyoftheBank.GroupInternalAudithasalsoestablishedacontinuouscontrolsmonitoringprocess to independentlyverify selectedcontrolsona regularbasis.Theauditassignmentsarecarriedout inaccordancewitha risk-basedinternalauditplanapprovedbytheAuditCommittee.

GroupInternalAuditreportskeyauditfindingsandstatusofmanagementactionplans,viaastructuredprocess,totheBoardAuditCommitteeonaquarterlybasis.

Management TheBoardofDirectorshasdelegatedauthorityfortheday-to-daymanagementoftheBank’sbusinesstotheActingChiefExecutiveOfficer,whoissupportedbyawell-qualifiedandexperiencedExecutiveManagementteam,andfourManagementCommittees.BiographiesoftheExecutiveManagersarelistedattheendofthisReview.



Management CommitteesInvestment and Post-Investment Management Committee (IPIMC) The IPIMC is responsible foroverseeing theentire investment life cycle, includingall internalapproval requirements,andexternalfinancialand legal due diligence. The Committee is actively involved at the acquisition phase, from the point of origination to the point of closing,whereitreceivesindependentassessmentsfromtheRiskDepartment.Inthepost-investmentphase,IPIMCoverseesmanagement’shandlingofinvestments,andtheperformanceoftheportfolio,toensureasuccessfulexit.TheCommitteeincludestheActingChiefExecutiveOfficer,ChiefFinancialOfficer,SeniorManagement,andHeadsofindependentfunctions.AllinvestmentsaresubjecttothefinalapprovaloftheBoardExecutiveCommittee.

Asset and Liability Committee (ALCO)ALCOestablishesthefunding,liquidityandmarketriskpoliciesfortheBank.ItiscomposedoftheHeadsofkeybusinessareasandfinance,risk,operationsandothercontrolareas.ALCO’sobjectivesaretomanagetheassetsandliabilitiesoftheBank,determinethestatementoffinancialpositionmix,andappropriateriskandreturnprofile.Itoverseesalltreasuryandcapitalmarketactivities,andallareasaffectedbyliquidityandmarketrisk.CashflowmanagementisamajorfocusofALCO,andtheCommitteeregularlyreviewsthebusinesslineinvestmentplanstoensurethatsufficientfundingisinplace.ALCOensuresthattheappropriatemixofshort-,medium-andlong-termfundingstrategiesisdevelopedinconjunctionwiththeBank’sTreasuryandCapitalMarketsfunctions.

Risk CommitteeTheRiskCommittee’soverallresponsibilityistoensurethattheBankdevelopsappropriateriskpoliciesandstrategiesfortherelevantbusinessactivities, includingcompliancewithBasel II.TheCommitteeoverseestheriskmanagement,complianceandalloperationalactivitiesoftheBank;andreviewsandapprovesriskmanagementprinciples,frameworks,policies,projects,limitprocessesandprocedures.Furthermore,itisthefirstinstitutionalbodytoapproveallcounterparty,marketrisk,businesslineandcountrylimitsonagroup-widebasis.



Professional BiographiesBoard of Directors

Yousef A. Al-ShelashChairmanoftheBoardofDirectorsandFoundingShareholderChairmanoftheBoardExecutiveCommitteeNon-executiveDirectorsinceApril2004 ASaudinational,Mr.YousefA.Al-ShelashistheChairmanofDarAlArkanRealEstateDevelopmentCompany(DarAlArkan)SaudiArabia.HeisalsotheChairmanoftheStrategicAcquisitionFund,Bahrain.Previously,Mr.Al-ShelashservedasamemberoftheInvestigationandAttorneyGeneralBureauinSaudiArabia,aswellasalegaladvisortovariouslegalconsultancyfirmsinSaudiArabia.HeobtainedanMScinLawandLegalProceedingsfromtheInstituteofPublicAdministrationAl-Riyadh,andaBScinShari’ahfromMohamedBinSaudIslamicUniversity,SaudiArabia.Hehasreceivedformaltraininginfinancialmanagementandevaluationofinvestmentprojects,andhasalsoearneddiplomasinbothBankingandCombatingFinancialCrimes.Mr.Al-ShelashisoneofthepioneersoftherealestatedevelopmentindustryintheKingdomofSaudiArabia,beginningovertwodecadesagointheearly1990s.HealsoinitiatedtherealestatemortgageindustryinSaudiArabiain1998.Professional experience: over 20 years

Ayman Ismail AbudawoodIndependentdirectorsinceDecember2008ASaudinational,Mr.AymanAbudawoodisVicePresidentofFinance,Regional&OverseasInvestments,andLegalStructuringattheAbudawoodGroup,adiversifiedinternationalconglomeratebasedinSaudiArabia,withinvestmentsintheMiddleEast,EuropeandtheUSA.HehasheldseniormanagementpositionsattheAbudawoodGroupforover20years,andservesontheboardsofAl-KhabeerMerchantFinanceCorporation(Saudi Arabia), Helvetia Arab General Trade Company (Kuwait) andOryx Capital (Saudi Arabia). He is also the Chairman of AlpineWealthManagement,anindependentwealthmanagementadvisorygroupbasedinBahrain.Mr.AbudawoodholdsaBScinMechanicalEngineeringfromtheUniversityofArizona,USA.Professional experience: over 20 years

Hethloul Saleh Al-HethloulNon-executivedirectorsinceApril2004andFoundingShareholderMr.HethloulBinSalehAl-HethloulisaSaudinational,foundingshareholderandmemberofDarAlArkan’sBoardofDirectors.Hehasover20yearsofexperienceinrealestateinvestmentandfinance,specificallyconceptualisingrealestatestrategiesandrelatedmanagerialplans.Mr.Al-HethloulholdsadiplomaofCommercialSecondaryInstitutesinRiyadh(1990).Professional experience: over 20 years

Abdullatif Abdullah Al-ShalashNon-executivedirectorsinceApril2004Mr.AlAbdullatifAl-ShalashisaSaudinationalandhasconsiderableexperienceinfinancialandinformationmanagementsystems.HeoccupiesthepositionofManagingDirectoratDarAlArkan.HeisalsoaBoardmemberoft’azurandtheStrategicAcquisitionFund,Bahrain.Mr.Al-ShalashholdsaBachelor’sdegreeinOrganizationLeadershipandSupervisionfromPurdueUniversity,USA;andanMBAfromFindlayUniversity,USA.Professional experience: over 18 years

Dr. Ahmed Al-DehailanChairmanoftheAuditCommitteeandfoundingshareholderIndependentdirectorsinceFebruary2011Dr.AhmedAl-DehailanservedastheChiefFinancialOfficerandAdvisortotheGeneralManageratDarAlArkan.HewasalsoalectureratAlEmamMohamedUniversity inRiyadh.Dr.Al-Dehailanholdsboardmemberships inseveralothercompanies includingtheSaudiHomeLoanCompany(Director);theStrategicAcquisitionFundCompany(MemberoftheInvestmentCommittee);BahrainFinancingCompany(Director),BFCGroupHoldingLimitedandBFCGroupHoldingsW.L.L.(Director);t’azur,Bahrain(Director);andt’azur,Kuwait(Chairman).Dr.Al-DehilanholdsaDoctoralDegreeinAccountingandFinancefromCardiffUniversity,UK.Professional experience: over 19 years



Dr. Abdulaziz Al OrayerChairmanoftheNomination,Remuneration&GovernanceCommitteeIndependentdirectorsinceFebruary2011ASaudinational,Dr.AbdulazizAlOrayerbringstotheBoardextensiveexperiencegainedover39yearsofworkinginhigh-levelpositionsinSaudiArabia’spublicandprivatesectors.HehasbeenamemberoftheSaudiArabianMajlisAl-Shurasince1997.Dr.AlOrayeristheChairmanoft’azur’sBoardofDirectors,apositionhehasheldsincetheCompany’sinception.Hehasoverseentheevolutionoft’azurintooneoftheleadingplayersintheGCCfamilyandgeneralTakafulindustry.HeisalsoaBoardmemberofAlkhairInternationalBankBerhad,Malaysia.Previously,hewastheDeputyMinisterfortheSaudiMinistryofFinanceandNationalEconomy.Dr.AlOrayerholdsaDoctorateinEconomicsandBusinessAdministration fromtheUniversityofWales,UK;aMastersdegree inEconomicsandBanking fromSouthern IllinoisUniversity,USA;andaBachelorofArtsfromtheUniversityofCalifornia,Berkeley,USA.Professional experience: over 39 years

Khalid ShaheenIndependentdirectorsinceApril2012Mr.KhalidShaheeniscurrentlyaBoardmemberandtheChairmanoftheAuditCommitteeofNationalFinanceHouse,andaBoardmemberofBFCGroupHoldingsinBahrain.Throughouthiscareer,Mr.Shaheenheldvarioushigh-levelpositionsinprominentfinancial institutionsinBahrain,includingBahrainiSaudiBank,BahrainDevelopmentBank,ShamilBankandGulfInternationalBank.HealsoheldaseriesofBoardandCommitteemembershipsinvariousorganisationsinBahrain’spublicandprivatesectors.Mr.ShaheenholdsaBachelorsdegreeinBusinessfromtheUniversityofSt.Thomas,Houston,Texas,USA;andheisaFellowoftheInstituteofDirectors,UK.Professional experience: over 30 years

Ali Al-OthaimNon-ExecutivedirectorsinceJune2013Mr.AliAl-OthaimholdsaBachelor’sdegree inBusinessAdministration.He receivedextensive training in theGlobal InvestmentdivisionofMerrill Lynch in theUnitedKingdom,aswellas theNASDAQProgram2stock tradingand technicalanalysis, inaddition tomanyadvancedcoursesinseniormanagementintheUSA.Mr.Al-Othaimbeganhiscareerasakeypartnerinthefamilygroupofcompanies,andthenbecameamemberofseveralcompanies,includingARCILGroupfortheCaymanIslandsandInvestment,whichinvestsequity,bondsandmutualfundsinglobalmarkets.Takingadvantageofhisfinancialbackgroundandexperienceaccumulatedinthisfield.Mr.AliAl-OthaimistheChairmanoftheNationalCommitteeofYoungBusinessmenCouncilofSaudiChambers,andoneofthefoundersoftheCommitteeofYoungBusinessmeninSaudiArabia.HeisaBoardMemberofthePrinceSalmanCenterforYoungEntrepreneurs,andamemberoftheExecutiveCommitteeofthePrince SalmanAward for YoungEntrepreneurs.Amemberof the YoungArab Leaders, he is also amemberof the SaudiManagementAssociation.Mr.AliAl-OthaimisheadoftheentrepreneurprogramtosupportentrepreneursinRiyadhChamberofCommerceandIndustry;andthePresidentoftheInternationalForumofInvestmentProspects.Professional experience: 0ver 15 years

Waleed AlasfoorIndependentdirectorsinceJune2013AKuwaitinational,Mr.AlasfooristheChiefExecutiveOfficerofWarbaInvestmentCompany,AlSafwaGroupHoldingCompany,andCarpetsIndustryCompany.HepreviouslyheldseniorkeymanagementpositionswiththeIndustrial&Financial InvestmentCompany,Kuwait,whichisaninvestmentcompanyengagedinall investmentoperations,finance,tradingandmanagement, inrespectoffundsandrightsrelatedtoindustrialprojects.Mr.AlasfoorisViceChairmanoftheBoardofAlSafatHoldingCompanyandCarpetsIndustryCompany.HeparticipatedintheestablishmentoftheKuwaitOffsetFund,andservedasChairmanoftheManagementCommitteeoftheFundfrom2002to2004.HehasalsoparticipatedinmanyotherfundsmembershipsandforeigncompaniesinEuropeandJapan.Mr.AlasfoorholdsaBachelorofScienceinEconomicsfromKuwaitUniversity;andaMasterinBusinessManagement(Funding)fromtheUniversityCityOklahoma,USAProfessional experience: over 25 years

Sultan AbalkheelIndependentdirectorsinceJune2013ASaudinational,Mr.Abalkheelhassuccessfullyestablishedvariousbusinessesovertheyearsinconjunctionwithgrowingandmanaginghisfamily’sinterestsinrealestate,equityandotherfinancialmarketactivities.Inaddition,hehasbusinessinterestsinleadingconstructionanddevelopmentcompaniesandequitymarkets.Mr.AbalkheelholdsaMaster’sDegreeinManagementfromtheUniversityofCardiff,UK.Professional experience: over 15 years



Abdullah AldubaikhiIndependentdirectorsinceJune2013Mr.AbdullahAldubaikhi is theCEOofSaudiAgriculturalandLivestock InvestmentCompany(SALIC).Priorto joiningSALIChewasPresidentofAfwaf Investment, andPresidentofAwalNet,oneof the largest internetproviders in SaudiArabia.Mr.Aldubaikhi co-foundedDowLongTechnologiesin1993afterworkingasaprojectmanagerattheSaudiIndustrialDevelopmentFund.HestartedhiscareerasacommunicationengineeratSaudiTelecomin1987.He isamemberoftheJointBusinessCouncilsbetweenSaudiArabiaandthenationsofFrance,Poland,SwitzerlandandQatar.MrAbdullahAldubaikhiholdsanExecutiveMBAfromOxfordUniversity,UK:andaBScdegreeinElectricalEngineeringfromKingFahadUniversityofPetroleumandMinerals,SaudiArabia.Professional experience: over 20 years

Khaled AbdulrahimIndependentdirectorsinceJune2013Mr.KhaledRahimisfounderandChairmanoftheKARGroupofcompanies.Theflagship,Cebarco,isaleadingbuildingconstructionandcivilengineeringcompanyresponsible formany landmarkprojectsofvaryingsizeandcomplexity,notably theBahrain InternationalCircuit,AbuDhabiFormula1Circuit,andBahrainCityCenter,amongothericonicprojects.Mr.RahimwasalsoExecutiveDirectorofHafeeraContractingWLLandassociatedcompanies.Hehasbeenawardedmanyaccoladesduringhiscareer,includingtheprestigious‘HMtheKingofBahrainMedalforServicestotheKingdomanditsPeople’.Mr.RahimholdsanMScfromtheGlasgowCaledonianUniversity,Scotland,UK;andisaFellowoftheCharteredInstituteofBuilding,UK;andFellowoftheAssociationofCostEngineers,UK.Professional experience: over 30 years

Abdulrazaq Al-WohaibNon-ExecutivedirectorsinceJune2013Mr.AbdulrazaqAl-WohaibservesasChiefExecutiveOfficerandManagingDirectoroft’azurTakafulInsuranceCompany.Hebringsawealthofexperienceandknowledgeoftheinsuranceindustrygainedinhismanyyearsinthesector.Hehasheldseniorpositionswithmanyhigh-profileinsuranceprovidersinKuwait,includingTakafulInsuranceKuwait,WethaqInsurance,andGulfInsurance.Mr.Al-WohaibisaBoardMemberofKuwaitInsuranceFederation,andaMemberoftheExecutiveTechnicalCommitteeofGCCInsuranceFederation.HeholdsaBScinBusinessAdministrationfromAzusaPacificUniversity,California,USA;andisaMemberoftheCharteredInsuranceInstitute,London,UK.Professional experience: over 20 years

Majed Al QasemNon-ExecutivedirectorsinceJune2013A Saudi national, Mr. Majed Al Qasem is a Founding Shareholder and Non-executive Independent Director of Dar Al Arkan Real EstateDevelopmentCompany.HeisalsoaBoardMemberofAlBuraqRealEstateCompanyandNamaaAl-SarahCompany;andspentalmost10yearsasaMemberoftheInvestigation&AttorneyGeneralBureauinSaudiArabia.Mr.AlQasemholdsaBachelor’sDegreeinIslamicStudiesfromImamMohammedbinSaudIslamicUniversity,SaudiArabia.Professional experience: over 15 years

Dr. Khalid AteeqIndependentdirectorsinceJune2013ABahraininational,Dr.KhalidAteeqhasover30years’experienceinbanking,finance,auditingandaccounting.HeiscurrentlytheCEOandanIndependentBoardMemberatFamilyBank,Bahrain;andChairmanoftheAudit&RiskCommittee.HeisalsoanIndependentBoardMemberandChairmanoftheAudit&RiskCommitteeofMEDGULFInsuranceCo.,Bahrain;andChairmanoftheBoardofTrusteesatGulfUniversity.From1993to2005,Dr.AteeqwasExecutiveDirectorofBankingSupervisionattheCentralBankofBahrain(CBB),wherehewasresponsiblefor the licensing, inspection and supervision of financial institutions, ensuring that all banks and financial institutions, either operating orincorporatedinBahrain,compliedwithpromulgatedlawsandregulations.BeforejoiningtheCBB,hewasAssistantProfessorofAccountingandAuditingattheUniversityofBahrain.Dr.AteeqholdsaPhDinthePhilosophyofAccountingfromHullUniversity,UK;anMBAfromArmstrongUniversity,Berkeley,USA;andaBScinAccountingandFinancefromtheUniversityofKuwait.Professional experience: over 30 years

MessrsAymanBoodai,AdelAlSaqabiandBaderKanoocompletedtheirthree-yeartermon26June2013.MrKhalilNooruddinresignedon 24February2013.




Dr. Khalid Mathkoor Al-MathkoorChairmanDr.KhalidMathkoorAl-Mathkoor istheChairmanoftheHigherConsultativeCommitteeforFinalisationoftheApplicationoftheProvisionsofIslamicShari’ahfortheStateofKuwait.HeisaLecturerintheDivisionofComparativeJurisprudenceandShari’ahPolicyoftheFacultyofShari’ahandIslamicStudiesattheUniversityofKuwait.Dr.Al-MathkoorisamemberoftheHigherPlanningBoardoftheStateofKuwait,andservesontheShari’ahSupervisoryBoardsofanumberofIslamicbanks.HeholdsaPhDinShari’ahfromAl-AzharUniversity.

Dr. Aagil Jasim Al-NashmyDeputyChairmanDr.AagilJasimAl-NashmyisaProfessorattheFacultyofShari’ahandIslamicStudiesattheUniversityofKuwait.HerepresentstheStateofKuwaitintheIslamicFiqhAcademy,whichevolvedfromtheOrganisationofIslamicConferenceinJeddah,SaudiArabia.HeisamemberoftheShari’ahSupervisoryBoardsofanumberofIslamicbanks,aswellasoftheAccountingandAuditingOrganisationforIslamicFinancialInstitutions(AAOIFI).Dr.Al-NashmyalsoservesontheFatwaCommitteeoftheKuwaitMinistryofAwqafandIslamicAffairs.HeholdsaPhDinShari’ahfromAl-AzharUniversity.

Dr. Abdul Sattar Abu GhuddahDr.AbdulSattarAbuGhuddahisamemberoftheIslamicFiqhAcademywhichevolvedfromtheOrganisationofIslamicConferenceinJeddah,SaudiArabia.HesitsonboththeStandardsBoardandShari’ahBoardofAAOIFI.HeisalsoamemberoftheShari’ahSupervisoryBoardforanumberofIslamicbanks.Dr.AbuGhuddahholdsaPhDinShari’ahfromAl-AzharUniversity.

Dr. Ali Muhyealdin Al-QuradaghiDr.AliMuhyealdinAl-QuradaghiisaProfessorandChairmanoftheDepartmentofJurisprudenceanditsPrinciplesintheFacultyofShari’ahLawandIslamicStudiesattheUniversityofQatar.HeisamemberoftheIslamicFiqhAcademy,whichevolvedfromtheOrganisationofIslamicConferenceinJeddah,SaudiArabia;andalsositsontheShari’ahSupervisoryBoardforanumberofIslamicbanks.Dr.Al-QuradaghiholdsaPhDinShari’ahfromAl-AzharUniversity.

Dr. Mohammad Daud BakarDr.MohammadDaudBakariscurrentlypresidentandCEOoftheInternationalInstituteofIslamicFinanceInc.,andAmanieBusinessSolutionsSdn.Bhd.KualaLumpur,Malaysia.HeisalsotheChairmanoftheShari’ahAdvisoryCouncilsofboththeSecuritiesCommissionandBankNegara(CentralBank),Malaysia.Dr.BakarholdsaPhDinShari’ahfromSt.AndrewsUniversity,UK;andisaMemberoftheShari’ahSupervisoryBoardforanumberofIslamicbanks.

Sh. Nizam Mohammad Saleh YaqoubySh.NizamMohammadSalehYaqouby isawell-renownedShari’ahscholarandamemberof theShari’ahSupervisoryBoardofanumberofIslamic banks and institutions, including the Shari’ah Board of AAOIFI. He holds a BA in Economics and Comparative Religion fromMcGillUniversity,Canada.



Executive Management

Jonathan H. HolleyActingChiefExecutiveOfficerMr. JonathanHolley has held several positions during his timewithBankAlkhair, including President ofUIBCapital, theBank’s formerUSsubsidiary:andManagingDirector,StrategicMergers&Acquisitions.He is currentlyChairmanofBFCGroupHoldingsandOpenSilicon Inc.Jonathanhasover25yearstransactionexperienceinemergingmarketsinSouthAmerica,EasternEuropeandtheGCC.Duringthistime,heworkedwithAndersenConsultingBrazil,Ernst&Young,InternetCapitalGroup(ofwhichhewasaFoundingTeamMemberandVicePresident,priortoitsacquisitionbyAccenture),MatterhornCapital,andDubaiGroupTatweerCapital.AlicensedProfessionalEngineer,JonathanholdsanMSC inTransportationManagementandaBSC in IndustrialEngineering fromNorthwesternUniversity,USA;andanMA in InternationalTransactionsfromGeorgeMasonUniversity,USA.

Dr. Muhammad Al-Bashir M. Al-AmineGroupHeadofShari’ahDr.MuhammadAl-Bashirhasover12yearsexperienceinthefieldofIslamicfinanceandShari’ahcompliance.Heisresponsibleforoverseeingthe Shari’ah affairs of the Bank and its subsidiaries through close coordination with the Bank’s Shari’ah Supervisory Board and seniormanagementteam.PriortojoiningBankAlkhair,hewastheHeadofProductDevelopmentandShari’ahComplianceattheInternationalIslamicFinancialMarket(IIFM).Hewasalsoapart-timelectureratanumberofuniversitiesandinstitutesinMalaysiaandBahrain;andistheauthorofnumerousbooksandarticlesonIslamicbankingandfinance.Dr.MuhammadholdsaLLB(Shari’ah)fromtheIslamicUniversityofMadina,SaudiArabia;andaMastersofComparativeLaw(MCL)andPhDinLawfromtheInternationalIslamicUniversity,Malaysia.

Ikbal Daredia ChiefExecutiveOfficer,AlkhairInternationalIslamicBankBerhadMr. IkbalDarediahas20yearsofexperience in Islamicbanking.Prior to joiningBankAlkhair,hewas theDeputyChiefExecutiveOfficerofNoriba,UBS’sglobalIslamicplatformforShari’ah-compliantproductsandservices.Priortothis,heworkedwithABNAMROinBahrainastheGlobalHeadofIslamicFinancialServices.IkbalhasoriginatedandexecutedseveralIslamicstructuredcross-bordertransactionsforsovereignentitiesandcorporatesinTurkey,theGCC,thePhilippines,India,PakistanandtheUnitedKingdom.HeisanAssociateoftheCharteredInstituteofBankers,England,UK.

Gülsevim KahramanGeneralManager,AlkhairCapitalTurkeyMs.GülsevimKahramanhas25yearsofexperienceininvestmentbanking,coveringoperations,finance,reportingandmanagementinformationsystems(MIS).Priorto joiningAlkhairCapital,Ms.KahramanworkedforDeniz InvestasFinancialControllerandFinancialBusinessSupportManager.Previously, shewasFinanceManager forKent Invest,where shewas responsible for reporting to theCapitalMarketsBoardandIstanbulStockExchange;andmanagingthebusinessplanningprocessandMISsystems.ACertifiedPublicAccountant,GülsevimhasaBachelor’sdegreeinEconomicsfromMarmaraUniversity;andanAdvancedLevelLicenceandDerivativesLicencefromtheTurkishCapitalMarketsBoard.

Ali İlhan GeneralManager,AlkhairPortfoyTurkeyMr.Ali İlhanhas20yearsofexperience inassetmanagement,havingworked for leadingassetmanagementcompanies inTurkey.HewaspreviouslytheHeadofEquityFundManagementinEczacibasi-UBPAssetManagement,ajointventureofEczacibasiHoldingandUnionBancairePriveeofSwitzerland,wherehemanagedequitymutual fundsandpensionfunds.Priortothis,hewastheChief InvestmentOfficer inABNAMROAssetManagementinTurkey,wherehehadfullresponsibilityforallinvestmentproceduresbothinequityandfixedincome.AliİlhanhasanMBAfromtheUniversityofScranton,USA;andaBScinCivilEngineeringfromtheMiddleEastTechnicalUniversity.

Khalid Al-MulhimActingChiefExecutiveOfficer,AlkhairCapitalSaudiArabiaMr.KhalidAl-Mulhimhasover16yearsofexperienceworkingforprominentfinancial institutionsinSaudiArabia,includingSambaFinancialGroup.PriortojoiningAlkhairCapital,hewasHeadofOperationsatArabianCapital.KhalidholdsaBachelor’sdegreeinBusinessAdministrationfromtheCentralStateUniversity,California,USA.



Aziz Rehman SheikhChiefFinancialOfficerMr.AzizRehmanSheikhhasover20yearsfinancialservicesexperiencegainedprimarilywithinleadingfinancialinstitutionsinLondon.BeforejoiningBankAlkhair,AzizwasManagingDirectorintheInternationalEquitiesDivisionofBearStearnsInternationalLimited(UK).PriortothatheheldseniorroleswithinABNAMROEquities(UK),AbbeyNationalTreasuryServicesandWarburg(Custody)LimitedUK.HeisaFellowoftheAssociationofCharteredCertifiedAccountantsandaMemberoftheCharteredInstituteofSecurities&Investment.AzizholdsaBA(Hons)inAccountancy&FinancefromSouthamptonUniversityandanMBAfromLondonMetropolitanUniversity.

Kubra Ali MirzaChiefComplianceOfficer,MLRO&BoardSecretaryMs.KubraMirzahasover14yearsofexperienceininvestmentbanking,financialregulations,corporategovernance,compliance,financialcrimesandanti-moneylaundering.PriortojoiningBankAlkhair,shewastheHeadofCompliance,MLROandBoardSecretary;SecretaryoftheCorporateGovernanceCommittee;andSecretaryoftheFinance&InvestmentCommitteeatVentureCapitalBank,Bahrain.Priortothat,sheworkedforTatweerConsultingCompany,andtheCentralBankofBahrain.Shewasalsoamemberofseveral localand internationalregulatoryworkinggroupsandtaskforces.KubraholdsanExecutiveMBAandaBachelor’sdegreeinAccountingfromtheUniversityofBahrain.

Ayham GharaibehGeneralCounselMr.AyhamGharaibehhasover10yearsof legalexperienceininvestmentbanking,specialisinginprivateequity,assetmanagement,capitalmarkets,mergersandacquisitions,andcorporatefinancetransactions.Hehasstructuredandsuccessfullyclosedover30sizeabletransactionsatBankAlkhair todate.Prior to joiningtheBank,AyhamwastheGeneralCounselandChiefComplianceOfficeratAtlas InvestmentGroup(ABInvest),theinvestmentbankingarmofArabBank,Amman,Jordan.Mr.GharaibehholdsaMaster’sandBachelor’sdegreeinInternationalBusinessLaw.

Muhammad Abbas Khan HeadofGroupInternalAuditMr.AbbasKhanhasover15yearsofexperience in internalaudit, forensic investigations,andoperationalriskmanagement.Priorto joiningBankAlkhair,heworkedatErnst&Young,wherehewasinstrumentalindevelopingandenhancingcorporategovernancepractices,enterpriseriskmanagement,andinternalauditcapabilitiesforvariousinvestmentbanksandfinancialinstitutionsintheregion.MuhammadistheViceChairmanoftheAudit&LegalCommitteeoftheBahrainAssociationofBanks,andamemberoftheInstituteoftheCharteredAccountantsofPakistan.HeholdsaProfessionalCertificationfromtheInstituteofInternalAuditors,USA.



Consolidated Financial Statements For the year ended 31 December 2013

Contents

52 Independent Auditors’ Report53 Shari’ah Supervisory Board Report54 ConsolidatedStatementofFinancialPosition55 Consolidated Income Statement

56 Consolidated Statement of Changes In Equity57 Consolidated Statement of Cash Flows58 Consolidated Statement of Changes in Restricted Investment Accounts59 Notes to the Consolidated Financial Statements


Independent Auditors’ Report To the Shareholders of Bank Alkhair BSC (c), Manama, Kingdom of Bahrain

Report on the consolidated financial statements

WehaveauditedtheaccompanyingconsolidatedfinancialstatementsofBankAlkhairBSC(c) (the“Bank”)and itssubsidiaries (togetherthe“Group”),whichcomprisetheconsolidatedstatementoffinancialpositionasat31December2013,theconsolidatedincomestatement,theconsolidatedstatementofchangesinequity,theconsolidatedstatementofcashflowsandtheconsolidatedstatementofchangesinrestrictedinvestmentaccountsfortheyearthenended,andasummaryofsignificantaccountingpoliciesandotherexplanatorynotes.

Respective responsibilities of board of directors and auditors

TheseconsolidatedfinancialstatementsandtheGroup’sundertakingtooperateinaccordancewithIslamicShari’arulesandprinciplesaretheresponsibilityoftheboardofdirectorsoftheBank.Ourresponsibilityistoexpressanopinionontheseconsolidatedfinancialstatementsbasedonouraudit.

Basis of opinion

WeconductedourauditinaccordancewithAuditingStandardsforIslamicFinancialInstitutionsissuedbyAccountingandAuditingOrganisationforIslamicFinancial Institutions.Thosestandardsrequirethatweplanandperformtheaudittoobtainreasonableassuranceaboutwhethertheconsolidatedfinancialstatementsarefreeofmaterialmisstatement.Anauditincludesexamining,onatestbasis,evidencesupportingtheamountsanddisclosuresintheconsolidatedfinancialstatements.Anauditalsoincludesassessingtheaccountingprinciplesusedandsignificantestimatesmade bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audit provides areasonablebasisforouropinion.

Opinion

Inouropinion,theconsolidatedfinancialstatementsgiveatrueandfairviewofthefinancialpositionoftheGroupasat31December2013,andoftheconsolidatedresultsofitsoperations,itsconsolidatedcashflows,consolidatedchangesinequityandconsolidatedchangesinrestrictedinvestment accounts for the year then ended, in accordance with Financial Accounting Standards issued by the Accounting and AuditingOrganisationforIslamicFinancialInstitutions.

Report on other regulatory requirements

As required by the Bahrain Commercial Companies Law and Volume 2 of the Central Bank of Bahrain (CBB) Rule Book, we report that the Bank hasmaintainedproper accounting records and the consolidatedfinancial statements are in agreement therewith; thefinancial informationcontainedinthechairman’sreportisconsistentwiththeconsolidatedfinancialstatements;wearenotawareofanyviolationsoftheBahrainCommercialCompaniesLaw,theCentralBankofBahrainandFinancialInstitutionsLaw,theCBBRuleBook(Volume2,applicableprovisionsofVolume6andCBBdirectives),orthetermsoftheBank’smemorandumandarticlesofassociationhavingoccurredduringtheyearthatmighthavehadamaterialadverseeffectonthebusinessoftheBankoronitsfinancialposition;andsatisfactoryexplanationsandinformationhavebeenprovidedtousbythemanagementinresponsetoallourrequests.ExceptforthemattersdiscussedintheShari’aSupervisoryBoardReportdated 27 February 2014, we are not aware of any other breaches of the Shari’a rules and principles as determined by the Shari’a Supervisory BoardoftheBank.

27 February 2014Manama, Kingdom of Bahrain


Shari’ah Supervisory Board Report To the Shareholders of Bank Alkhair BSC (c), Manama, Kingdom of Bahrain

Asslamo A’laikom WA Rahmatu Allah WA Barakatuh

Incompliancewiththetermsofourletterofappointment,wearerequiredtoreportasfollows:

WehavereviewedthroughtheShari’ahdepartmentandunderoursupervisiontheprinciplesandthecontractsrelatingtothetransactionsconductedbyBankAlkhairB.S.C.(c)(“theBank”)anditssubsidiaries(together“theGroup”)duringtheyearended31December2013.WehaveconductedourreviewwithaviewtoformanopinionastowhethertheGrouphascompliedwithrulesandprinciplesofIslamicShari’ahandalsowiththespecificfatwa’s,rulingsandguidelinesissuedbyus.

TheGroup’smanagementisresponsibleforensuringthattheGroupconductsitsbusinessinaccordancewiththerulesandprinciplesofIslamicShari’ah.Itisourresponsibilitytoformanindependentopinion,basedonourreviewoftheoperationsoftheGroup,andtoreportthistoyou.

WeconductedourreviewthroughtheShari’ahdepartmentandunderoursupervisionwhichincludedexamining,onatestbasis,eachtypeoftransactionandtherelevantdocumentationandproceduresadoptedbytheGroup.WeplannedandperformedourreviewsoastoobtainalltheinformationandexplanationsthatweconsiderednecessaryinordertoprovideuswithsufficientevidencetogiveassurancethattheGrouphasnotviolatedanyrulesandprinciplesofIslamicShari’ah.

Inouropinion:

a) Thecontracts,transactionsanddealingsenteredintobytheGroupduringtheyearended31December2013areincompliancewiththerulesandprinciplesof IslamicShari’ahexceptpartof the investment inTajMallproject,OpenSiliconandThe IndependentForLogistics&WarehousingwhichwerenotsubmittedtotheShari’ahBoardforapprovalbeforeitsexecution,andappearlatertobehavingexplicitlynon-Shari’ahComplianceissues.

b) The allocation of profit and charging of losses relating to investment accounts conform to the basis that had been approved by us inaccordancewithIslamicShari’ahrulesandprinciples.

c) The Shari’ah Board advised the Bank’s management that all earnings that have been realized from sources or by means prohibited by rules andprinciplesofIslamicShari’ahprinciplesshallbedisposedoffandgiventocharityunderthesupervisionoftheShari’ahBoard.

d) ThecalculationofZakahisincompliancewiththerulesandprinciplesofIslamicShari’ah.

WesupplicatetoAllahtheAlmightytograntussuccessandastraightpath.

WaAsslamoA’laikomWaRahmatuAllahWaBarakatuh.

Dr. Khalid Al Mathkoor Dr. Aagil Al Nashmy

Dr. Abdul Sattar Abu Ghuddah Dr. Ali M. Al Qaradaghi

Sh. Nizam M. Yacoubi Dr. Mohamed Daud Bakar

27 February 2014

54

(Amounts in US $ thousands)

www.bankalkhair.com

Theaccompanyingnotes1to35formanintegralpartoftheseconsolidatedfinancialstatements.

Consolidated Statement of Financial Position As at 31 December 2013

note31 December

201331 December

2012

ASSETS Cash and balances with banks 4 15,836 7,985

Placementswithfinancialinstitutions 74,390 63,733

Financing receivables 5 52,309 86,623

Investmentsecurities 6 79,186 112,905

Assetsheld-for-sale 7 216,764 18,932

Equity-accountedinvestees 8 107,389 106,006

Investment property 9 73,719 17,706

Otherassets 10 7,410 25,988

Equipment 1,587 2,277

TOTAL ASSETS 628,590 442,155

LIABILITIES AND EQUITY

LIABILITIES

Duetofinancialinstitutions 11 51,173 153,121

Due to customers 12 217,594 68,176

Liabilitiesrelatedtoassetsheld-for-sale 7 92,427 -

Otherliabilities 13 18,810 24,978

TOTAL LIABILITIES 380,004 246,275

EQUITYShare capital 14 207,862 207,862

Statutory reserve 664 337

Fair value reserve 114 114

Foreigncurrencytranslationreserve (9,499) (8,485)

Accumulated losses (29,768) (32,715)

Equity attributable to the shareholders of the parent 169,373 167,113

Non-controllinginterests 28,456 28,767

Non-controllinginterestsrelatedtoassetsheld-for-sale 7 50,757 -

TOTAL EQUITY (page 56) 248,586 195,880

TOTAL LIABILITIES AND EQUITY 628,590 442,155

Theconsolidatedfinancialstatementsconsistingofpages54to90wereapprovedbytheBoardofDirectorson27February2014andsignedonitsbehalfby:

Yousef Abdullah Al-ShelashChairman

Hethloul Saleh Al-HethloulBoard Member



Consolidated Income Statement For the year ended 31 December 2013

note 2013 2012

Continuing operations

Finance income 7,034 8,742

Financeexpense (8,240) (7,814)

Net finance (expense)/ income (1,206) 928

Incomefrominvestmentsecurities 15 7,232 (10,676)

Fees and commission income 16 7,009 3,754

Shareofprofitofequity-accountedinvestees 8 5,752 10,575

Gainonacquisitionofassetsheld-for-sale 7 14,453 -

Otherincome 1,428 709

Total income 34,668 5,290

Staffcost 15,330 19,080

Legalandprofessionalexpenses 7,891 13,394

Premises cost 2,254 2,848

Businessdevelopmentexpenses 609 1,066

Depreciation 953 1,881

Otheroperatingexpenses 4,202 6,229

Total expenses 31,239 44,498

Profit / (loss) for the year before Zakah and impairment 3,429 (39,208)

ProvisionforZakah 17 (145) (1,719)

(Charge) / reversal of impairment 18 (2,017) 1,100

Profit / (loss) for the year from continuing operations 1,267 (39,827)

Incomefromassetsheld-for-saleanddiscontinuedoperations 7 3,472 64

Profit / (loss) for the year 4,739 (39,763)

Attributableto:

Shareholders of the parent 3,274 (36,868)

Non-controllinginterests (249) (2,895)

Non-controllinginterestsrelatingtoassetsheld-for-sale 1,714 -

4,739 (39,763)


56


www.bankalkhair.com

Consolidated Statement of Changes In Equity For the year ended 31 December 2013

Attributable to the shareholders of the parent

Non-controlling

interests

Non-controlling

interests related to

assets held- for-sale

Totalequity2013

Sharecapital

Statutoryreserve

Fair valuereserve

Foreigncurrency

translationreserve *

Accumulated losses Total

As at 1 January 2013 207,862 337 114 (8,485) (32,715) 167,113 28,767 - 195,880

Profitfortheyear(page55) - - - - 3,274 3,274 (249) 1,714 4,739

Foreigncurrencytranslationdifferences - - - (746) - (746) (62) - (808)

Share of changes in reserves of equity-accountedinvestees - - - (268) - (268) - - (268)

Total recognised income and expense for the year - - - (1,014) 3,274 2,260 (311) 1,714 3,663

Transfer to statutory reserve - 327 - - (327) - - - -

Non-controllinginterestsrelatedtoassetsheld-for-sale - - - - - - - 49,043 49,043

As at 31 December 2013 207,862 664 114 (9,499) (29,768) 169,373 28,456 50,757 248,586

Attributabletotheshareholdersoftheparent

Non-controlling

interestsTotal

equity2012 Share

capitalStatutory

reserveFair value

reserve

Foreigncurrency

translationreserve *

Accumulated losses Total

As at 1 January 2012 207,862 337 (227) (8,642) 4,153 203,483 31,683 235,166

Loss for the year (page 55) - - - - (36,868) (36,868) (2,895) (39,763)

Foreigncurrencytranslationdifferences - - - 417 - 417 (21) 396

Fair value changes - - 192 - - 192 - 192

Share of changes in reserves of equity accounted investees - - 149 (260) - (111) - (111)

Total recognised income and expensefortheyear - - 341 157 (36,868) (36,370) (2,916) (39,286)

As at 31 December 2012 207,862 337 114 (8,485) (32,715) 167,113 28,767 195,880

* TranslationreserveamountingtoUS$6,306thousand(31December2012:US$6,306thousand)isattributabletoassetsheld-for-saleandwill be recycled to the consolidated income statement on disposal




Consolidated Statement of Cash Flows For the year ended 31 December 2013


2013 2012

OPERATING ACTIVITIES

Profit/lossfortheyear 4,739 (39,763)Adjustmentsfor:ProvisionforZakah 145 1,719Gainonsaleofinvestmentsecurities (1,022) (1,375)Fairvaluechangesininvestmentsecurities (5,202) 13,386Shareofprofitofequity-accountedinvestees (5,752) (10,575)Gainonacquisitionofassetsheld-for-sale (14,453) -Incomefromassetsheld-for-saleanddiscontinuedoperations (3,472) -Depreciationandamortisation 953 1,881OtherIncome (1,133) -Sukukamortisation (348) (1,054)Charge / (reversal) of impairment 2,017 (1,100)

(23,528) (36,881)

Changesin:Financing receivables 31,290 9,215Otherassets 7,354 16,914Duetofinancialinstitutions (86,838) (5,167)Due to customers 149,418 (20,307)Otherliabilities (6,348) 7,054

Proceedsfromsaleofinvestmentsecurities 34,210 17,970Purchaseofinvestmentsecurities (16,952) (13,000)

Net cash generated from / (used in) operating activities 88,606 (24,202)

INVESTING ACTIVITIES

Net disposal / (purchase) of equipment 105 (275)Investmentsinequity-accountedinvestees (2,600) 3,252Purchase of investment property (56,013) -Dividendsreceivedfromequity-accountedinvestees 4,336 -

Net cash (used in) / generated from investing activities (54,172) 2,977

FINANCING ACTIVITIES

(Repayment)/drawdownofbankfinancing (15,110) 15,110

Net cash (used in) / generated from financing activities (15,110) 15,110

Net increase/ (decrease) in cash and cash equivalents during the year 19,324 (6,115)

Effectofexchangeratechangesoncashandcashequivalents (816) 275

Cash and cash equivalents at the beginning of the year 71,718 77,558

CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR 90,226 71,718

Cashandcashequivalentscomprise:Cash and balances with banks 15,836 7,985Placementswithfinancialinstitutions 74,390 63,733

90,226 71,718

58


www.bankalkhair.com

Consolidated Statement of Changes in Restricted Investment Accounts For the year ended 31 December 2013

2013At 1 January

2013 Deposit Gross income Wakil fee WithdrawalsAt 31 December

2013

Wakala contract - 500 15 (3) (512) -

2012At 1 January

2012 Deposit Grossincome Wakil fee WithdrawalsAt 31 December

2012

Wakala contract 3,604 - 91 (36) (3,659) -


Notes to the Consolidated Financial Statements For the year ended 31 December 2013


1. REPORTING ENTITY

BankAlkhairB.S.C.(c)(“theBank”)wasincorporatedintheKingdomofBahrainandregisteredwiththeMinistryofIndustryandCommerceunderCommercialRegistrationNo.53462on29April2004andoperatesunderawholesaleIslamicbankinglicensegrantedbytheCentralBankofBahrain(CBB).TheBank’sregisteredofficeisatthe4thfloorofBuildingNo.2304,RoadNo.2830,SeefDistrict428,Manama,KingdomofBahrain.

TheBankanditssubsidiaries(togetherreferredtoas“theGroup”)aimtoprovideafullrangeofinvestmentbankingproductsandservicesthatarecompliantwithShari’ahprinciples.TheprincipalproductsandservicesofferedbytheGroupare:

- financialadvisoryservices;- privateequity,equitystructuring,privateplacementsandinitialpublicofferings;- facilitystructuring,restructuringandplacementincludingprojectfinance,securitisationandSukuk;- structuringandmarketingofbothopenandclosedendmutualfundsaswellasclientportfoliomanagementandbrokerageservicesthat

aimtomeetinvestordrivenreturnandassetcriteria;- advisoryandinvestmentservicesfortakaful(Islamicinsurance)andretakaful(Islamicreinsurance)providers;andmergersandacquisitions,includingdealsourcing,structuring,valuationsandadvisory.

Consolidated financial statements

TheconsolidatedfinancialstatementscomprisetheresultsoftheBankanditssubsidiaries.

ThefollowingaretheprincipalsubsidiariesoftheBankthatareconsolidated:

Subsidiary Ownership

Year of incorporation / Acquisition

Country of incorporation Principal activity

AlkhairInternationalIslamicBank Malaysia Berhad

100% 2004 Malaysia AlkhairInternationalIslamicBankMalaysiaBerhadwasestablishedin2004tosourceinvestmentopportunitiesin the Far East and monitor the performance of the acquired companies on behalf of the Bank and investorsandtoestablishdistributionchannelsfortheGroup.In 2007, Alkhair International Islamic Bank MalaysiaBerhad was granted an investment banking license by Bank Negara Malaysia to carry out investment banking activityincurrenciesotherthantheMalaysianRinggit.

Alkhair Capital Menkul DegerlerA.S.

91.9% 2007 Turkey ThemainactivitiesofAlkhairCapitalMenkulDegerlerA.S. are to provide investment consultancy and assetmanagement.

Alkhair Capital Saudi Arabia 53.4% 2009 Kingdom of Saudi Arabia

Alkhair Capital Saudi Arabia was incorporated in March 2009andregisteredwithCapitalMarketsAuthority.Itsprincipal activities are AssetManagement, CorporateFinance&InvestmentbankingandBrokerage.

Al-TajamouatforTouristicProjectsCoPlc

50.6% 2013 Jordan Al-TajamouatforTouristicProjectsCowasincorporatedin January2004. Itsprincipalactivitiesare realestateproperty investment & development and ownershipandoperationofashoppingmallinAmman.

TheBankhasotherspecialpurposeentities(SPE’s)holdingcompaniesandsubsidiarieswhicharesetuptosupplementtheactivitiesoftheBankanditsprincipalsubsidiaries.



2. BASIS OF PREPARATION

(a) Statement of compliance

TheconsolidatedfinancialstatementshavebeenpreparedinaccordancewithFinancialAccountingStandards(‘FAS’)issuedbytheAccountingandAuditingOrganisationforIslamicFinancialInstitutions(AAOIFI).InlinewiththerequirementofAAOIFIandtheCBBRuleBook,formattersthatarenotcoveredbyFAS,theGroupusesguidancefromtherelevantInternationalFinancialReportingStandards(‘IFRS’).

(b) Basis of measurement

Theconsolidatedfinancialstatementshavebeenpreparedunderthehistoricalcostconventionexceptforcertaininvestmentsecuritiescarriedatfairvalue.TheconsolidatedfinancialstatementsarepresentedinUnitedStatesDollars(US$),beingthefunctionalcurrencyoftheGroup’soperations.AllfinancialinformationpresentedinUS$hasbeenroundedtothenearestthousands,exceptwhenotherwiseindicated.

Going concern

TheBank’smanagementhasmadeanassessmentoftheGroup’sabilitytocontinueasagoingconcernandissatisfiedthattheGrouphastheresourcestocontinueinbusinessforforeseeablefuture.ThemanagementisnotawareofanymaterialuncertaintiesthatmaycastsignificantdoubtupontheGroup’sabilitytocontinueasagoingconcern,andaccordingly,theconsolidatedfinancialstatementshavebeenpreparedonagoingconcernbasis.

(c) Basis of consolidation

(i) SubsidiariesSubsidiariesarethoseenterprises(includingspecialpurposeentities)controlledbytheBank.ControlexistswhentheGrouphasthepower,directlyorindirectly,togovernthefinancialandoperatingpoliciesofanenterprisesoastoobtainbenefitsfromitsactivities.SubsidiariesareconsolidatedfromthedateonwhichcontrolistransferredtotheGroupandde-consolidatedfromthedatethatcontrolceases.

Specialpurposeentities (SPEs)areentities thatarecreatedtoaccomplishanarrowandwell-definedobjectivesuchas thesecuritisationofparticularassets,ortheexecutionofaspecificborrowingorinvestmenttransaction.AnSPEisconsolidatedif,basedonanevaluationofthesubstanceofitsrelationshipwiththeGroupandtheSPE’srisksandrewards,theGroupconcludesthatitcontrolstheSPE.TheassessmentofwhethertheGrouphascontroloveranSPE iscarriedoutat inceptionandnormallynofurtherreassessmentofcontrol iscarriedout intheabsenceofchangesinthestructureortermsoftheSPE,oradditionaltransactionsbetweentheGroupandtheSPE.WheretheGroup’svoluntaryactions, suchas lendingamounts inexcessofexisting liquidity facilitiesorextending termsbeyond thoseestablishedoriginally, change therelationshipbetweentheGroupandanSPE,theGroupperformsareassessmentofcontrolovertheSPE.

TheGroupinitsfiduciarycapacityalsomanagesandadministersassetsheldintrustandotherinvestmentvehiclesonbehalfofinvestors.ThefinancialstatementsoftheseentitiesarenotincludedintheseconsolidatedfinancialstatementsexceptwhentheGroupcontrolstheentity.InformationabouttheGroup’sfiduciaryassetsundermanagementissetoutinnote21.

Loss of control

Upon the loss of control, the Group derecognises the assets and liabilities of the subsidiary, any non-controlling interests and the othercomponentsofequityrelatedtothesubsidiary.Anysurplusordeficitarisingonthelossofcontrol isrecognisedintheconsolidatedincomestatement.IftheGroupretainsanyinterestintheprevioussubsidiary,thensuchinterestismeasuredatfairvalueatthedatethatcontrolislost.Subsequentlyitisaccountedforasanequity-accountedinvesteeorinaccordancewiththeGroup’saccountingpolicyforfinancialinstrumentsdependingonthelevelofinfluenceretained.

Non-controlling interests

Interests in the equity of subsidiaries not attributable to the parent are reported in consolidated statement of financial position as non-controlling interests.Profitsor lossesattributabletonon-controlling interestsarereportedintheconsolidated incomestatementas incomeattributabletonon-controllinginterests.Lossesapplicabletothenon-controllinginterestsinasubsidiaryareallocatedtothenon-controllinginterestsevenifdoingsocausesthenon-controllingintereststohaveadeficitbalance.

The Group treats transactions with non-controlling interests as transactions with equity owners of the Group. For purchases from non-controllinginterests,thedifferencebetweenanyconsiderationpaidandtherelevantshareacquiredofthecarryingvalueofnetassetsofthesubsidiaryisrecordedinequity.Gainsorlossesondisposalstonon-controllinginterestsarealsorecordedinequity.

WhentheGroupceases tohavecontrolor significant influence,any retained interest in theentity is remeasured to its fairvalue,with thechange in carryingamount recognised in the consolidated income statement. The fair value is the initial carryingamount for thepurposesof subsequently accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts previouslyrecognisedinequityinrespectofthatentityareaccountedforasiftheGrouphaddirectlydisposedoftherelatedassetsorliabilities.Thismaymeanthatamountspreviouslyrecognisedinotherequityarereclassifiedtotheconsolidatedincomestatement.



2. BASIS OF PREPARATION (continued)

(ii) Investmentinassociates(Equity-accountedinvestees)Associatesare thoseentities inwhich theGrouphas significant influence,butnot controlor joint control,over thefinancial andoperatingpolicies.SignificantinfluenceispresumedtoexitwhentheGroupholdsbetween20%and50%ofthevotingpowerofanotherentity.

Oninitialrecognitionofanassociate,theGroupmakesanaccountingpolicychoiceastowhethertheassociateshallbeequityaccountedordesignatedasatfairvaluethroughincomestatement.TheGroupmakesuseoftheexemptioninFAS24-InvestmentinAssociatesforventurecapitalorganisationanddesignatescertainof its investment inassociates,as ‘investmentscarriedat fairvalue through incomestatement’.Theseinvestmentsaremanaged,evaluatedandreportedoninternallyonafairvaluebasis(refernote3(b)).

If the equity accountingmethod is chosen for an associate, these are initially recognised at cost and the carrying amount is increased ordecreasedtorecognisetheinvestor’sshareoftheprofitorlossoftheinvesteesafterthedateofacquisition.Distributionsreceivedfromaninvesteereducethecarryingamountoftheinvestment.Adjustmentstothecarryingamountmayalsobenecessaryforchangesintheinvestor’sproportionateinterestintheinvesteesarisingfromchangesintheinvestee’sequity.WhentheGroup’sshareoflossesexceedsitsinterestinanequity-accountedinvestee,theGroup’scarryingamountisreducedtonilandrecognitionoffurtherlossesisdiscontinuedexcepttotheextentthattheGrouphasincurredlegalorconstructiveobligationsormadepaymentsonbehalfoftheequity-accountedinvestees.

AnyexcessofthecostofacquisitionovertheGroup’sshareofthenetfairvalueoftheidentifiableassets,liabilitiesandcontingentliabilitiesofanequity-accountedinvesteeatthedateofacquisitionisrecognisedasgoodwill,andincludedwithinthecarryingamountoftheinvestment.Whentheexcessisnegative,abargainpurchasegainisrecognisedimmediatelyintheconsolidatedincomestatement.

If theownership interest inanequity-accounted investee is reducedbut significant influence is retained,onlyaproportionateshareof theamountspreviouslyrecognisedinequityisreclassifiedtotheconsolidatedincomestatementwhereappropriate.

(iii)TransactionseliminatedonconsolidationandequityaccountingIntra-groupbalancesandtransactions,andanyunrealisedgainsorlossesarisingfromintra-grouptransactions,areeliminatedinpreparingtheconsolidatedfinancialstatements.Intra-groupgainsontransactionsbetweentheGroupanditsequity-accountedinvesteesareeliminatedtotheextentoftheGroup’sinterestintheinvestees.Unrealisedlossesarealsoeliminatedinthesamewayasunrealisedgains,butonlytotheextentthatthereisnoevidenceofimpairment.

ThereportingperiodoftheGroup’ssubsidiariesandequity-accountedinvesteesareidenticalandtheiraccountingpoliciesconformtothoseusedbytheBankfor liketransactionsandevents insimilarcircumstances.Theaccountingpoliciesofthesubsidiariesandequity-accountedinvesteeshavebeenchangedwherenecessarytoensureconsistencywiththepoliciesadoptedbytheGroup.

(d) Business combination

Businesscombinationsareaccountedforusingtheacquisitionmethodasattheacquisitiondatei.e.whencontrolistransferredtotheGroup.Theconsiderationtransferredintheacquisition isgenerallymeasuredatfairvalue,asaretheidentifiablenetassetsacquired.Anygoodwillthatarisesistestedannuallyforimpairment.Anygainonabargainpurchaseisrecognisedintheconsolidatedincomestatementimmediately.Transactioncostsareexpensedasincurred,exceptiftheyarerelatedtotheissueofdebtorequitysecurities.

Theconsiderationtransferreddoesnot includeamountsrelatedtothesettlementofpre-existingrelationships.Suchamountsaregenerallyrecognised inconsolidated incomestatement.Anycontingentconsiderationpayable ismeasuredat fairvalueattheacquisitiondate. If thecontingentconsiderationisclassifiedasequity,thenitisnotremeasuredandsettlementisaccountedforwithinequity.Otherwise,subsequentchangesinthefairvalueofthecontingentconsiderationarerecognisedinprofitorloss.

Ifshare-basedpaymentawards(replacementawards)arerequiredtobeexchangedforawardsheldbytheacquiree’semployees(acquiree’sawards)and relate topast services, thenalloraportionof theamountof theacquirer’s replacementawards is included inmeasuring theconsideration transferred in the business combination. This determination is based on themarket-based value of the replacement awardscomparedwiththemarket-basedvalueoftheacquiree’sawardsandtheextenttowhichthereplacementawardsrelatetopre-combinationservice

3. SIGNIFICANT ACCOUNTING POLICIES

The accountingpoliciessetoutbelowhavebeenappliedconsistentlybyGroupentitiestoallperiodspresentedintheseconsolidatedfinancialstatementsexceptforstandardsissuedandeffectivefrom1January2013,FAS26-‘Investmentinrealestate’whichisgivenbelow:

TheGrouphasadoptedFinancialAccountingStandard26(“FAS26”)“Investmentinrealestate”issuedbyAAOIFIduring2012,whichiseffectivefrom1January2013.ThenewstandardreplacestherequirementsofFAS17whichwasappliedforinvestmentsinrealestate.Thesignificantrequirementofthestandardisthatforinvestmentinrealestateheld-for-use,theentityshallchooseeitherfairvaluemodelorcostmodelasitsaccountingpolicy.Wheretheentityadoptsfairvaluemodel,thenfairvaluechangesshouldbedirectlyrecognisedinequityunder‘propertyfairvaluereserve’.Thestandardhastobeappliedretroactively.



3. SIGNIFICANT ACCOUNTING POLICIES (continued)

Previously,theGroupwasfollowingthefairvaluemodel.Onthedateofadoptionofthestandard,theGroupoptedtomeasureinvestmentpropertyusingthecostmodel.TheadoptionofthenewstandarddidnothaveanymaterialimpactontheconsolidatedfinancialstatementsoftheGroup.

Newstandards,amendmentsandinterpretationsissuedbutnotyeteffectiveforadoption

TherearenoAAOIFIaccountingstandardsor interpretationsthatareeffectivefor thefirsttimefor thefinancialyearbeginningonorafter 1January2014thatwouldbeexpectedtohaveamaterialimpactontheGroup.

a) Foreign currency transactions

ItemsincludedintheconsolidatedfinancialstatementsoftheGrouparemeasuredusingthecurrencyoftheprimaryeconomicenvironmentinwhichtheentityoperates(‘thefunctionalcurrency’).TheconsolidatedfinancialstatementsarepresentedinUS$,whichistheBank’sfunctionalandpresentationcurrency.

Foreigncurrencytransactionsaretranslatedusingtheexchangeratesprevailingatthedatesofthetransactions.Foreignexchangegainsandlossesresultingfromthesettlementofsuchtransactionsandfromthetranslationatyear-endexchangeratesofmonetaryassetsandliabilitiesdenominatedinforeigncurrenciesarerecognisedintheconsolidatedincomestatement.Translationdifferencesonnon-monetaryitemscarriedattheirfairvalue,suchascertainequitysecuritiesmeasuredatfairvaluethroughequity,areincludedininvestmentsfairvaluereserve.

Other group companies

Asatthereportingdate,theassetsandliabilitiesofsubsidiaries,equity-accountedinvesteesandjointventurearetranslatedintotheBank’sfunctional currencyat the rateof exchangeprevailing at the reportingdate, and their statementsof incomeare translatedat theaverageexchangeratesfortheyear.Exchangedifferencesarisingontranslationaretakendirectlytoaseparatereserveinequity.Ondisposalofaforeignentity, the deferred cumulative amount recognised in equity relating to that particular foreign operation is recognised in the consolidatedincomestatement.

b) Investment securities

Investment securities comprise debt and equity instruments, but exclude investment in subsidiaries and equity-accounted investees (refernote2(cii)).

(i) ClassificationTheGroupsegregatesitsinvestmentsecuritiesintodebt-typeinstrumentsandequity-typeinstruments.

Debt-type instruments

Debt-typeinstrumentsareinvestmentsthatprovidefixedordeterminablepaymentsofprofitsandcapital.Investmentsindebt-typeinstrumentsareclassifiedinthefollowingcategories:

At fair value through income statement (FVTIS)

These investments areeithernotmanagedon contractual yieldbasis or designatedon initial recognitionat FVTIS to avoid any accountingmismatchthatwouldariseonmeasuringtheassetsorliabilitiesorrecognisingthegainsorlossesonthemondifferentbases.Currently,theGroupdoesnothaveanyinvestmentunderthiscategory.

At amortised cost

Thisclassificationisfordebt-typeinstrumentswhicharenotdesignatedasFVTISandaremanagedoncontractualyieldbasis.Theseincludeinvestmentsinmediumtolong-termsukuk.

Equity-type instruments

Equity-typeinstrumentsareinvestmentsthatdonotexhibitfeaturesofdebt-typeinstrumentsandincludeinstrumentsthatevidencearesidualinterestintheassetsofanentityafterdeductingallitsliabilities.Investmentsinequitytypeinstrumentsareclassifiedinthefollowingcategories:




b) Investment securities (continued)

(i) Classification(continued)

At fair value through income statement (FVTIS)

Equity-typeinstrumentsclassifiedandmeasuredatFVTIS includeinvestmentsheld-for-tradingandthosedesignatedoninitialrecognitionatFVTIS.

Investments are classified as held-for-trading if acquired or originated principally for the purpose of generating a profit from short-termfluctuationsinpriceordealersmarginorthatformpartofaportfoliowherethereisanactualpatternofshort-termprofittaking.TheGroupcurrentlydoesnothaveanyofitsinvestmentsclassifiedasinvestmentsheld-for-tradingpurposes.

On initial recognition,anequity-type instrument isdesignatedasFVTISonly if the investment ismanagedand itsperformance isevaluatedandreportedoninternallybythemanagementonafairvaluebasis.Thiscategorycurrentlyincludesinvestmentinprivateequity,fundsandinvestment in associates (refer note 2 (c) (ii))

At fair value through equity (FVTE)

Equity-typeinstrumentsotherthanthosedesignatedatFVTISareclassifiedasatfairvaluethroughequity.Thiscategoryincludesinvestmentinunquotedequitysecurities.

(ii) Recognitionandde-recognitionInvestmentsecuritiesarerecognisedatthetradedatei.e.thedatethattheGroupcontractstopurchaseorselltheasset,atwhichdatetheGroupbecomespartytothecontractualprovisionsoftheinstrument.InvestmentsecuritiesarederecognisedwhentherightstoreceivecashflowsfromthefinancialassetshaveexpiredorwheretheGrouphastransferredsubstantiallyallriskandrewardsofownership.

(iii) MeasurementInvestment securities aremeasured initially at fair value, which is the value of the consideration given. For investments carried at FVTIS,transactioncostsareexpensedintheconsolidatedincomestatement.Forotherinvestmentsecurities,transactioncostsareincludedasapartoftheinitialrecognition.

Subsequenttoinitialrecognition,investmentscarriedatFVTISandFVTEarere-measuredtofairvalue.GainsandlossesarisingfromachangeinthefairvalueofinvestmentscarriedatFVTISarerecognisedintheconsolidatedincomestatementintheperiodinwhichtheyarise.Gainsandlosses arising from a change in the fair value of investments carried at FVTE are recognised in the consolidated statement of changes in equity andpresentedinaseparatefairvaluereservewithinequity.

WhentheinvestmentscarriedatFVTEaresold,impaired,collectedorotherwisedisposedof,thecumulativegainorlosspreviouslyrecognisedinthestatementofchangesinequityistransferredtotheconsolidatedincomestatement.

InvestmentscarriedatFVTEwheretheentityisunabletodetermineareliablemeasureoffairvalueonacontinuingbasis,suchasinvestmentsthat do not have a quoted market price or where there are no other appropriate methods from which to derive reliable fair values, are stated atcostlessimpairmentallowances.

Subsequenttoinitialrecognition,debt-typeinvestmentsotherthanthosecarriedatFVTISaremeasuredatamortisedcostusingtheeffectiveprofitmethodlessanyimpairmentallowances.

(iv) Measurement principles

Amortised cost measurement

Theamortisedcostofafinancialassetorliabilityistheamountatwhichthefinancialassetorliabilityismeasuredatinitialrecognition,minuscapitalrepayments,plusorminusthecumulativeamortisationusingtheeffectiveprofitmethodofanydifferencebetweentheinitialamountrecognisedandthematurityamount,minusanyreductionforimpairment.Thecalculationoftheeffectiveprofitrateincludesallfeesandpointspaidorreceivedthatareanintegralpartoftheeffectiveprofitrate.

Fair value measurement

Fairvalueistheamountforwhichanassetcouldbeexchanged,oraliabilitysettled,betweenknowledgeable,willingpartiesinanarm’slengthtransactiononthemeasurementdate.

TheGroupmeasures the fair valueofquoted investmentsusing themarketbid-prices inanactivemarket for that instrument.Amarket isregardedasactiveifquotedpricesarereadilyandregularlyavailableandrepresentactualandregularlyoccurringmarkettransactionsonanarm’slengthbasis.




b) Investment securities (continued)

(iv)Measurementprinciples(continued)Ifamarketforafinancialinstrumentisnotactiveortheinstrumentisnotquoted,theGroupestablishesfairvalueusingavaluationtechnique.Valuationtechniquesincludeusingrecentarm’slengthtransactionsbetweenknowledgeable,willingparties(ifavailable),discountedcashflowanalysisandothervaluationmodelswithacceptedeconomicmethodologiesforpricingfinancialinstruments.

c) Financing receivables

FinancingreceivablescompriseShari’ahcompliantfinancingcontractswithfixedordeterminablepayments.TheseincludefinancingprovidedthroughMurabahacontracts.Financingassetsarerecognisedonthedatetheyareoriginatedandarecarriedattheiramortisedcost.

d) Placements with financial institutions

Thesecompriseinter-bankplacementsmadeusingShari’ahcompliantcontracts.Placementsareusuallyforshort-termandarestatedattheiramortisedcost.

e) Due to financial institutions

These comprise funds fromfinancial institutions receivedon Shari’ah compliant contracts. Due to financial institutions are stated at theiramortisedcost.

f) Due to customers

These comprise funds payable to corporate customers received using Shari’ah compliant contracts. Due to customers are stated at theiramortisedcost.

g) Impairment of assets

TheGroupassessesateachreportingdatewhetherthereisobjectiveevidencethataspecificfinancialassetoragroupoffinancialassetsmaybeimpaired.Afinancialassetoragroupoffinancialassetsisdeemedtobeimpairedif,andonlyif,thereisobjectiveevidenceofimpairmentasaresultofoneormoreeventsthathaveoccurredaftertheinitialrecognitionoftheasset(anincurred“lossevent”)andthatthelossevent(s)haveanimpactontheestimatedfuturecashflowsofthefinancialassetorthegroupoffinancialassetsthatcanbereliablyestimated.

Financial assets carried at amortised cost

Forfinancialassetscarriedatamortisedcostimpairmentismeasuredasthedifferencebetweenthecarryingamountofthefinancialassetsandthepresentvalueofestimatedcashflowsdiscountedattheassets’originaleffectiveprofitrate.Lossesarerecognisedinconsolidatedincomestatementandreflectedinanallowanceaccount.Whenasubsequenteventcausestheamountofimpairmentlosstodecrease,theimpairmentloss is reversed through the consolidated income statement. The Group considers evidence of impairment for financial assets carried atamortisedcostatbothaspecificassetandcollectivelevel.Allindividuallysignificantfinancialassetsareassessedforspecificimpairment.Allindividuallysignificantfinancialassets foundnottobespecifically impairedarethencollectivelyassessedforany impairmentthathasbeenincurredbutnotyetidentified.Financialassetsthatarenotindividuallysignificantarecollectivelyassessedforimpairmentbygroupingtogetherassetswithsimilarriskcharacteristics.

Investments carried at fair value through equity (FVTE)

InthecaseofinvestmentsinequitysecuritiesclassifiedasFVTE,asignificantorprolongeddeclineinthefairvalueofthesecuritybelowitscostisanobjectiveevidenceofimpairment.IfanysuchevidenceexistsforFVTEinvestments,theunrealisedre-measurementlossshallbetransferredfromequitytotheconsolidatedincomestatement.

The cumulative lossmeasured as the difference between the acquisition cost and the current fair value, less any impairment loss on thatinvestment previously recognised in the consolidated income statement is removed from equity and recognised in the consolidated income statement. Impairment losses recognised in the consolidated income statement on equity instruments are subsequently reversed throughequity.

ForFVTEinvestmentscarriedatcostlessimpairmentduetotheabsenceofreliablefairvalue,theGroupmakesanassessmentofwhetherthereisanobjectiveevidenceofimpairmentforeachinvestmentbyassessmentoffinancialandotheroperatingandeconomicindicators.Impairmentisrecognisediftheestimatedrecoverableamountisassessedtobebelowthecostoftheinvestment.Currently,theGroupdoesnothaveanyinvestmentsunderthiscategory.




g) Impairment of assets (continued)

Non-financial assets

ThecarryingamountoftheGroup’sassetsor itscashgeneratingunit,otherthanfinancialassetscarriedatamortisedcostandinvestmentscarriedatFVTE,arereviewedateachreportingdatetodeterminewhetherthereisanyindicationofimpairment.Acashgeneratingunitisthesmallest identifiableassetgroupthatgeneratescashflowsthat largelyare independent fromotherassetandgroups. Ifanysuch indicationexists,theasset’srecoverableamountisestimated.Therecoverableamountofanassetoracashgeneratingunitisthegreaterofitsvalueinuseorfairvaluelesscoststosell.

In assessing value in use, the estimated future cashflows arediscounted to their present valueusing a discount rate that reflects currentmarketassessmentsofexpectedreturnandtherisksspecifictotheassetorcashgeneratingunit.Animpairmentlossisrecognisedwheneverthecarryingamountofanassetoritscashgeneratingunitexceedsitsestimatedrecoverableamount.Impairmentlossesarerecognisedintheconsolidatedincomestatement.Impairmentlossesarereversedonlyifthereisanindicationthattheimpairmentlossmaynolongerexistandtherehasbeenachangeintheestimatesusedtodeterminetherecoverableamount.Separatelyrecognisedgoodwillisnotamortisedandistestedannuallyforimpairmentandcarriedatcostlessaccumulatedimpairmentlosses.Impairmentlossesonseparatelyrecognisedgoodwillarenotreversed.

Inassessingtheimpairmentof investmentproperty,theGroupperiodicallyusesexternal independentvaluerstodeterminetherecoverableamountbasedonmarketvalueofproperty.

h) Investment property

Investmentpropertycompriselandandbuilding.Investmentpropertyisinvestmentsthatearnrentalincomeand/orareexpectedtobenefitfromcapital appreciationor landheld forundetermined futureuse. Investmentpropertiesaremeasured initially at cost, includingdirectlyattributable expenditures. Subsequently, investment property is carried at cost less accumulated depreciation (where applicable) andaccumulatedimpairmentlosses(ifany).Impairmentofinvestmentpropertyisevaluatedonassets-by-assetsandnotonportfoliobasisateachreportingperiod.

Depreciationiscalculatedtowrite-offthecostofitemsofinvestmentpropertylesstheirestimatedresidualvalueusingstraightlinebasisovertheirestimatedusefullife.Depreciationisrecognisedintheconsolidatedincomestatement.Landisnotdepreciated.Thebuildingisdepreciatedover useful life of 50 years.Depreciationmethods and estimateduseful life and residual value are reviewed at each reportingperiod andadjustedifappropriate.

Investmentpropertiesarederecognisedwhentheyhavebeendisposedoforwhentheinvestmentpropertyispermanentlywithdrawnfromuseandnofutureeconomicbenefitisexpectedfromitsdisposal.Anygainsorlossesontheretirementordisposalofaninvestmentpropertyarerecognisedintheconsolidatedincomestatementintheyearofretirementordisposal.

i) Equipment

Equipment includes computers, office equipment, fixtures and fittings. Equipment is recorded at cost less accumulated depreciation.Depreciationiscomputedusingthestraight-linemethodtowrite-offthecostoftheassetsovertheirestimatedusefullivesrangingfrom1to8years.Theassetsresidualvaluesandusefullivesarereviewed,andadjustedifappropriate,ateachreportingdate.

j) Assets held-for-sale and discounted operations

i) ClassificationTheGroupclassifiesnon-currentassetsordisposalgroupsasheld-for-saleifitscarryingamountisexpectedtoberecoveredprincipallythroughasaletransactionratherthanthroughcontinuingusewithintwelvemonths.Adisposalgroupisagroupofassetstobedisposedof,bysaleorotherwise, togetherasagroup ina single transaction,and liabilitiesdirectlyassociatedwith thoseassets thatwill be transferred in thetransaction.Asubsidiaryacquiredexclusivelywithaviewtoresaleisclassifiedasdisposalgroupheld-for-saleandincomeandexpensefromitsoperationsarepresentedaspartofdiscontinuedoperation.

Ifthecriteriaforclassificationasheldforsalearenolongermet,theentityshallceasetoclassifytheasset(ordisposalgroup)asheldforsaleandshallmeasuretheassetatthelowerofitscarryingamountbeforetheasset(ordisposalgroup)wasclassifiedasheld-for-sale,adjustedforanydepreciation,amortisationorrevaluationsthatwouldhavebeenrecognisedhadtheasset(ordisposalgroup)notbeenclassifiedasheld-for-saleanditsrecoverableamountatthedateofthesubsequentdecisionnottosell.

Anyimpairmentlossonadisposalgroupisallocatedfirsttogoodwill,andthentotheremainingassetsandliabilitiesonaproratabasis,exceptthatnolossisallocatedtofinancialassetsandinvestmentpropertycarriedatfairvalue,whichcontinuetobemeasuredinaccordancewiththeGroup’sotheraccountingpolicies.Impairmentlossesoninitialclassificationasheld-for-saleandsubsequentgainsandlossesonremeasurementarerecognisedintheconsolidatedincomestatement.Gainsarenotrecognisedinexcessofanycumulativeimpairmentloss.




j) Assets held-for-sale and discounted operations (continued)

ii) MeasurementNon-currentassetsordisposalgroupsclassifiedasheld forsale,other thanfinancial instruments,aremeasuredat the lowerof itscarryingamount and fair value less costs to sell. Financial instruments that are non-current assets and ‘held-for-sale’ continue to bemeasured inaccordancewiththeirstatedaccountingpolicies.Onclassificationofequity-accountedinvesteeasheld-for-sale,equityaccountingisceasedatthetimeofsuchclassificationasheld-for-sale.Non-financialassets(i.e.intangibleassets,equipment)arenolongeramortisedordepreciated.

iii) DiscountedoperationsAdiscontinuedoperationisacomponentoftheGroup’sbusiness,theoperationsandcashflowsofwhichcanbeclearlydistinguishedfromtherestoftheGroupandwhich:

• representsaseparatemajorlineofbusinessorgeographicalareaofoperations;

• ispartofasingleco-ordinatedplantodisposeofaseparatemajorlineofbusinessorgeographicalareaofoperations;or

• isasubsidiaryacquiredexclusivelywithaviewtore-sale.

Classificationasadiscontinuedoperationoccursondisposalorwhentheoperationmeetsthecriteriatobeclassifiedasheld-for-sale,ifearlier.Whenanoperationisclassifiedasadiscontinuedoperation,thecomparativeconsolidatedincomestatementisre-presentedasiftheoperationhadbeendiscontinuedfromthestartofthecomparativeyear.

k) Restricted investment accounts

RestrictedinvestmentaccountsrepresentfundsreceivedbytheGroupfromthirdpartiesforinvestmentinspecifiedproductsasdirectedbytheinvestmentaccountholders.TheseassetsaremanagedinafiduciarycapacityandtheGrouphasnoentitlementtotheseassets.Clientsbearalloftherisksandearnalloftherewardsontheseinvestments.RestrictedinvestmentsarenotincludedintheconsolidatedstatementoffinancialpositionsincetheGroupdoesnothavetherighttouseordisposetheseinvestmentsexceptwithintheconditionsofthecontractbetweentheGroupandholdersofrestrictedinvestmentaccounts.

l) Revenue recognition

RevenueisrecognisedwhenitisprobablethatfutureeconomicbenefitswillflowtotheGroupandtheamountoftherevenuecanbereliablymeasured.RevenueearnedbytheGroupandgain/lossonassetsarerecognisedonthefollowingbasis:

Dividend incomeisrecognisedwhentheGroup’srighttoreceivethepaymentisestablished.

Gain / (loss) on sale of investment securities (realised gain / (loss))isrecognisedontradedateatthetimeofderecognitionoftheinvestmentsecurities.Thegainorlossisthedifferencebetweenthecarryingvalueonthetradedateandtheconsiderationreceivedorreceivable.

Fair value gain / (loss) on investment securities (unrealised gain or loss) is recognised on each measurement date in accordance with the accountingpolicyforequity-typeinstrumentscarriedatfairvaluethroughincomestatement(refernote3b).

Sukuk IncomecomprisesthecouponprofitonSukukandrealisedgainorlossonthesaleofSukuk.Thecouponprofitisrecognisedthroughtheeffectiveprofitrateinaccordancewiththeaccountingpolicyfordebt-typeinstrumentcarriedatamortisedcosts(referto3b).RealisedgainorlossonsaleofSukukisrecognisedontradedateatthetimeofde-recognitionoftheSukuk.Thegainorlossisthedifferencebetweenthecarryingvalueonthetradedateandthefairvalueofconsiderationreceivedorreceivable.

Fees and Commission incomerepresentsadvisoryfees,arrangementfees,managementfeesandbrokeragefees.FeesandCommissionincomeisrecognisedatthefairvalueofconsiderationreceivedorreceivableandwhentheserviceisprovidedandincomeisearned.ThisisusuallywhentheGrouphasperformedallsignificantactsinrelationtoatransactionanditishighlyprobablethattheeconomicbenefitsfromthetransactionwillflowtotheGroup.Significantactsinrelationtoatransactionaredeterminedbasedonthetermsforeachtransaction.

Finance income and expense

FinanceincomeandexpenseisrecognisedonatimeapportionedbasisovertheperiodoftheShari’ahcomplaintcontractsbasedoneffectiveprofitrate.




m) Employee benefits

(i) Short-termbenefitsShort-termemployee benefit obligations aremeasured on an undiscounted basis and are expensed as the related service is provided andrecognisedasstaffcostintheconsolidatedincomestatement.Aprovisionisrecognisedfortheamountexpectedtobepaidundershort-termcashbonusorprofit-sharingplans if theGrouphasapresent legalorconstructiveobligation topay thisamountasa resultofpast serviceprovidedbytheemployeeandtheobligationcanbeestimatedreliably.

(ii)Post-employmentbenefitsPensionsandothersocialbenefitsforlocalemployeesarecoveredbytheSocialInsuranceOrganisationscheme,whichisa“definedcontributionscheme”innature,andtowhichemployeesandemployerscontributemonthlyonafixed-percentage-of-salariesbasis.ContributionsbytheGrouparerecognisedasstaffcostintheconsolidatedincomestatementwhentheyaredue.TerminationbenefitsarerecognisedasanexpensewhentheGroupiscommitteddemonstrably,withoutrealisticpossibilityofwithdrawal,toaformaldetailedplantoeitherterminateemploymentbeforethenormalretirementdate,ortoprovideterminationbenefitsasaresultofanoffermadetoencouragevoluntaryredundancy.

Certain employees on fixed contracts are also entitled to leaving indemnities payable, based on length of service and final remuneration.Provisionforthisunfundedcommitmenthasbeenmadebycalculatingthenotionalliabilityhadallemployeesleftatthereportingdate.Thesebenefitsareinthenatureof“definedbenefitscheme”andanyincreaseordecreaseinthebenefitobligationisrecognisedasstaffcostintheconsolidatedincomestatement.

n) Earnings prohibited by Shari’ah

TheBankiscommittedtoavoidrecognisinganyincomegeneratedfromnon-Islamicsources.Accordingly,allnon-IslamicincomeiscreditedtoacharityaccountwheretheBankusesthesefundsforcharitablepurposes.

o) Zakah

TheBankisnotobligedtopayZakahonbehalfofitsshareholders.However,theBankisrequiredtocalculateandnotifyindividualshareholdersoftheirpro-ratashareoftheZakahpayableamount.

p) Provision for Zakah

Provision for Zakah represents Zakah from operation in Kingdom of Saudi Arabia and computed in accordance with Saudi Arabia Zakahregulations.

q) Offsetting of financial instruments

Financialinstrumentscompriseoffinancialassetsandfinancialliabilities.Financialassetsincludecashandbalanceswithbanks,placementswithfinancialinstitutions,financingreceivables,investmentsecuritiesandotherassets.Financialliabilitiesincludeduetofinancialinstitutions,duetocustomers,otherliabilitiesandfinancialguarantees.

FinancialassetsandfinancialliabilitiesareonlyoffsetandthenetamountsreportedintheconsolidatedstatementoffinancialpositionwhenthereisalegallyenforceablerighttosetofftherecognisedamountsandtheGroupintendstoeithersettletheseonanetbasis,orintendstorealisetheassetandsettletheliabilitysimultaneously.

r) Statutory reserve

TheBahrainCommercialCompaniesLaw2001requiresthat10percentoftheannualnetprofitbeappropriatedtoastatutoryreservewhichisnormallydistributableonlyondissolution.Appropriationsmayceasewhenthereservereaches50percentofthepaidupsharecapital.

s) Provisions

ProvisionsarerecognisedwhentheGrouphasapresentobligation(legalorconstructive)asaresultofapastevent,anditisprobablethatanoutflowofresourcesembodyingeconomicbenefitswillberequiredtosettletheobligationandareliableestimatecanbemadeoftheamountoftheobligation.AprovisionforrestructuringisrecognisedwhentheGrouphasapprovedadetailedandformalrestructuringplan,andtherestructuringeitherhascommencedorhasbeenannouncedpublicly.Futureoperatinglossesarenotprovidedfor.




t) Contingent liabilities and contingent assets

Contingent liabilities are not recognised in the consolidated financial statements, but are disclosed unless the possibility of an outflow ofresourcesembodyingeconomicbenefits isprobable.Contingentassetsarenot recognised in theconsolidatedfinancial statements,butaredisclosedwhenaninflowofeconomicbenefitsisprobable.

u) Financial guarantees

FinancialguaranteesarecontractsthatrequiretheGrouptomakespecifiedpaymentstoreimbursetheholderforalossit incursbecauseaspecifieddebtorfailstomakepaymentwhendueinaccordancewiththetermsofadebtinstrument.Loancommitmentsarefirmcommitmentstoprovidecreditunderpre-specifiedtermsandcommitments.Financialguaranteeliabilitiesarerecognisedinitiallyattheirfairvalue,andtheinitialfairvalueisamortisedoverthelifeofthefinancialguarantee.Thefinancialguaranteeliabilityissubsequentlycarriedatthehigherofthisamortisedamountandthepresentvalueofanyexpectedpaymentwhenapaymentundertheguaranteehasbecomeprobable.

v) Leases

Paymentsunderoperatingleasearerecognisedintheconsolidatedincomestatementonastraightlinebasisoverthetermofthelease.Leaseincentivesarerecognisedasanintegralpartofthetotalleaseexpense,overthetermofthelease.

w) Onerous contracts

AprovisionforonerouscontractsisrecognisedwhentheexpectedbenefitstobederivedbytheGroupfromthecontractarelowerthantheunavoidablecostofmeetingitsobligationsunderthecontract.Theprovisionismeasuredatthepresentvalueoftheloweroftheexpectedcostofterminatingthecontractandtheexpectednetcostofcontinuingwiththecontract.

x) Trade date accounting

All“regularway”purchasesandsalesoffinancialassetsarerecognisedonthetradedate,i.e.thedatethattheGroupcommitstopurchaseorselltheasset.

y) Cash and cash equivalents

Forthepurposeofconsolidatedstatementofcashflows,cashandcashequivalentscomprisecashinhand,bankbalancesandplacementswithfinancialinstitutionswithmaturitiesofthreemonthsorlessfromtheacquisitiondatethataresubjecttoinsignificantriskofchangesinfairvalueandareusedbytheGroupinthemanagementofitsshort-termcommitments.

z) Critical accounting estimates and judgements

TheGroupmakesestimatesandassumptionsthateffectthereportedamountsofassetsandliabilitieswithinthenextfinancialyear.Estimatesandjudgementsarecontinuallyevaluatedandarebasedonhistoricalexperienceandotherfactors,includingexpectationoffutureeventsthatarebelievedtobereasonableunderthecircumstances.

Judgements

(i) ClassificationofinvestmentsIntheprocessofapplyingtheGroup’saccountingpolicies,managementdecidesonacquisitionofaninvestmentwhetheritshouldbeclassifiedasinvestmentsatfairvaluethroughincomestatementorinvestmentscarriedatfairvaluethroughequityorinvestmentscarriedatamortisedcost.Theclassificationofeachinvestmentreflectsthemanagement’sjudgementinrelationtoitsstrategyforeachinvestmentandissubjecttodifferentaccountingtreatmentsbasedonsuchclassification(refernote3(b)).

(ii) SpecialpurposeentitiesTheGroupsponsorstheformationofspecialpurposeentities(SPE’s)primarilyforthepurposeofallowingclientstoholdinvestments.TheGroupprovidescorporateadministration,investmentmanagementandadvisoryservicestotheseSPE’s,whichinvolvetheGroupmakingdecisionsonbehalfofsuchentities.TheGroupadministersandmanagestheseentitiesonbehalfofitsclients,whoarebyandlargethirdpartiesandaretheeconomicbeneficiariesoftheunderlyinginvestments.TheGroupdoesnotconsolidateSPE’sthatitdoesnothavethepowertocontrol.

In determiningwhether theGrouphas the power to control an SPE, judgements aremade about the objectives of the SPE’s activities, itsexposuretotherisksandrewards,aswellasabouttheGroupintentionandabilitytomakeoperationaldecisionsfortheSPEandwhethertheGroupderivesbenefitsfromsuchdecisions.




z) Critical accounting estimates and judgements (continued)

Estimations

(i) FairvalueoffinancialinstrumentsWherethefairvaluesoffinancialassetsandfinancial liabilitiescannotbederivedfromactivemarkets, theyaredeterminedusingavarietyofvaluationtechniquesthat includetheuseofmathematicalmodels.The inputstothesemodelsarederivedfromobservablemarketdatawhere possible, butwhere observablemarket data are not available, judgment is required to establish fair values. The judgments includeconsiderationsofinputssuchasliquidityrisk,creditriskandvolatilityfordiscountrates.

Fairvalueisdeterminedforeachinvestmentindividuallyinaccordancewiththevaluationpoliciessetoutbelow:

- For investmentthat is traded inanactivemarket, fairvalue isdeterminedbyreferencetothequotedbidmarketpriceprevailingonthereportingdate;

- Forinvestmentinunquotedequitysecurities,theBankestablishesfairvaluebyusingvaluationtechniques.Valuationtechniquesincludeusingrecentarm’slengthmarkettransactionsbetweenknowledgeable,willingparties,ifavailable,referencetothecurrentfairvalueofanotherinstrumentthatissubstantiallythesameanddiscountedcashflowanalysis;and

- Investmentsinfundsorsimilarinvestmententitiesarecarriedatthelatestnetassetvaluationprovidedbythefundadministrator.

Theimpactonfairvalueoffinancialinstrumentsmeasuredatfairvalueforchangesinkeyassumptionsisgiveninnote20.

(ii) ImpairmentoffinancingreceivablesEachcounterpartyexposureisevaluatedindividuallyforimpairmentandisbaseduponmanagement’sbestestimateofthepresentvalueofthecashflowsthatareexpectedtobereceived.Inestimatingthesecashflows,managementmakesjudgementsaboutacounterparty’sfinancialsituation and thenet realisable valueof anyunderlying assets/ collaterals. Each impaired asset is assessedon itsmerits, and theworkoutstrategyandestimateofcashflowsconsideredrecoverableareindependentlyevaluatedbytheRiskManagementDepartment.Allindividuallysignificantfinancingreceivablesaretestedforspecificimpairment.Thosefoundnottobespecificallyimpairedarethencollectivelyassessedforanyimpairmentthathasbeenincurredbutnotyetidentified.

Financingreceivablesthatarenotindividuallysignificantarecollectivelyassessedforimpairmentbygroupingtogetherassetswithsimilarriskcharacteristics.

Inassessingcollectiveimpairment,theGroupuseshistoricaltrendsoftheprobabilityofdefault,thetimingofrecoveriesandtheamountoflossincurred,adjustedformanagement’sjudgementastowhethercurrenteconomicandcreditconditionsaresuchthattheactuallossesarelikelytobegreaterorlesserthansuggestedbyhistoricaltrends.

Animpairmentlossinrespectofafinancingreceivablesmeasuredatamortisedcostiscalculatedasthedifferencebetweenitscarryingamountandthepresentvalueoftheestimatedfuturecashflowsdiscountedattheasset’soriginaleffectiveprofitrate.Lossesarerecognisedinprofitorlossandreflectedinanallowanceaccountagainstfinancingreceivable.

Profitonthe impairedassetdoesnotcontinuetoberecognised.Whenaneventoccurringafterthe impairmentwasrecognisedcausestheamountofimpairmentlosstodecrease,thedecreaseinimpairmentlossisreversedthroughconsolidatedincomestatement.

(iii)ImpairmentofcashgeneratingunitsCashgeneratingunits include theGroup’s investments incertainsubsidiariesandequity-accounted investeesand investmentproperty thatgeneratecashflowsthatarelargelyindependentfromotherassetsandactivitiesoftheGroup.Thebasisofimpairmentassessmentforsuchcashgeneratingunits isdescribed inaccountingpolicy3 (g).Forequity-accounted investeeswith indicatorsof impairment, therecoverableamountshavebeendeterminedbasedonhigheroffairvaluelesscoststosellorvalueinuse.

Valueinusefortheequity-accountedinvesteeswasdeterminedbydiscountingthefuturecashflowsexpectedtobegeneratedfromcontinuingoperations,comparisontosimilarinstrumentsforwhichmarketobservablepricesexistandothervaluationmodels.

Theobjectiveofvaluationtechniquesistoarriveatafairvaluedeterminationthatreflectsthepriceofthefinancialinstrumentatthereportingdatethatwouldhavebeendeterminedbymarketparticipantsactingatarm’slength.FairvaluelesscoststosellofcertaincashgeneratingunitsisbasedonindicativeofferpricesreceivedbytheGroup.

Keyassumptionsusedinthecalculationofvalueinusewerethefollowing:cashflowswereprojectedbasedon3-5yearbusinessplans,afterensuringconsistencywithhistoricaloperatingresultsandforecastedeconomicgrowthratesformaturecompanies.TerminalgrowthratesweredeterminedbasedontheIMF’sforecastGDPgrowthratein5years’time.TheforecastperiodisbasedontheGroup’slongtermperspectivewithrespecttotheoperationsoftheseCGU’s.




z) Critical accounting estimates and judgements (continued)

(iii)Impairmentofcashgeneratingunits(continued)DiscountrateswerebasedonaCAPMformula,withtherisk-freerateobtainedfromtheyieldon10-yearbondsissuedbythegovernmentintherelevantmarketandinthesamecurrencyasthecashflows,adjustedforariskpremiumtoreflectboththeincreasedriskofinvestinginequitiesgenerally,aswellasliquidityandcontrolfactors.Thekeyassumptionsdescribedabovemaychangeaseconomicandmarketconditionschange.

4. CASH AND BALANCES WITH BANKS

31 December 2013

31 December 2012

Cash on hand 19 19

Balances with banks 15,817 7,966

15,836 7,985

5. FINANCING RECEIVABLES

31 December 2013

31 December 2012

Grossmurabahareceivables 56,224 87,735

Less:Deferredprofits (641) (862)

Less:Specificimpairmentallowances (2,974) -

Less:Collectiveimpairmentallowances (300) (250)

52,309 86,623

Financingreceivablescompriseduefromcustomersundermurabahafinancingcontracts.Theaverageprofitonthesebalancesduringtheyearwas7.2%perannum(2012:7.6%perannum).

6. INVESTMENT SECURITIES

31 December 2013

31 December 2012

Equity type instruments

At fair value through income statement:

-Quotedequitysecurities 51 23,691

-Unquotedequitysecurities* 29,846 32,771

-Quotedfunds 7,154 1,983

-Unquotedfunds* 28,360 28,397

Total equity type instruments 65,411 86,842

Debt type instruments

At amortised cost :

-Sukuk# 13,775 26,063

79,186 112,905

* UnquotedequitysecuritiesandunquotedfundscarriedatfairvaluethroughincomestatementprimarilycompriseassetsmanagedbytheGroup.Theseinvestmentsarecarriedatfairvaluedeterminedbasedonvaluationtechniques.Duringtheyear,theGrouprecognisedanetfairvaluelossofUS$2.9million(31December2012:fairvaluegainofUS$1.4million)ontheseinvestments.

# Thefairvalueoftheinvestmentscarriedatamortisedcostat31December2013isUS$13,734(2012:US$27,259)

(AmountsinUS$thousands)




6. INVESTMENT SECURITIES (continued)

Movement on investments carried at fair value through income statement as follows:

At 1 January2013

Additionsduring

the year

Disposals/ Reclassified

during the year

Foreign currency changes

Fairvalue

changesAt 31 December

2013

Investment in associates 83,309 4,249 (36,028) - 5,051 56,581

Quotedfunds 1,983 5,333 (57) (222) 117 7,154

Equity investments (< than 20% stake) 1,550 352 (248) (12) 34 1,676

86,842 9,934 (36,333) (234) 5,202 65,411

7. ASSETS AND LIABILITIES HELD-FOR-SALE

31 December 2013

31 December 2012

Subsidiaryheld-for-sale

-Assets 195,232 -

-Liabilities (92,427) -

Net assets 102,805 -

Equity-accountedinvestee 21,532 18,932

On31May2013, theGroupacquiredadditional stakeof4.17% inAl-Tajamouat forTouristicProjectsCoPlc (TAJ),acompany listedontheAmman Stock Exchange, Jordan to take the Group’s overall stake to 50.63% resulting in TAJ becoming a subsidiary. The investment waspreviouslyaccountedforasinvestmentcarriedatfairvaluethroughincomestatement.

The total consideration for the controlling stake amounted to US$ 35,838 thousand. As per acquisition accounting requirements, the netidentifiableassetsandliabilitiesrecognizedonacquisitionweremeasuredattheirfairvaluesonthedateofacquisition.TheBankhasrecognisedidentifiable assets of US$ 206,594 thousand and liabilities of US$ 107,260 thousand at the date of acquisition which also represents themanagement’sestimatedfairvaluelesscosttoselloftheinvestment.

Asthefairvalueoftherecognizednetidentifiableassetsisinexcessoftheconsiderationpaid,theexcessofUS$14,453thousandhasbeenrecognizedasagainonbargainpurchaseunder“gainonacquisitionofassetsheld-for-sale”intheconsolidatedincomestatement(i.e.negativegoodwill).ThegainonbargainpurchaseprimarilyarosefromthefactthatthepreviouslyheldstakeinTAJwasmeasuredatthequotedmarketprice,whichwassubstantiallybelowthefairvalueoftheunderlyingnetassetsofTAJ.

TheGrouphasanactiveplanapprovedbytheBoard,tosellitsstakeinTAJ,andaccordingly,theassetandliabilitiesacquiredareclassifiedasheld-for-saleintheconsolidatedstatementoffinancialposition.Theequityoftheremainingstakeof49.37%heldbyexternalpartiesisclassifiedas“non-controllinginterestsrelatedtoassetsheld-for-sale”intheconsolidatedstatementoffinancialposition.ThenetresultofoperationsofthesubsidiaryduringtheyearwasincomeofUS$3,472thousand(2012:Nil)whichispresentedseparatelyas“incomefromassetsheld-for-saleanddiscontinuedoperation”intheconsolidatedincomestatement.

Further,assetsheld-for-saleincludesinvestmentinBurjBankLimited,acommercialbankinPakistanofUS$21,532thousand(31December2012:US$18,932thousand),anequity-accountedinvestee,whichwasclassifiedasheld-for-saleinJune2012basedonanagreementsignedwith a potential buyer. During the year, the Bank subscribed to share right issue amounting US$ 2,600 thousand as per local regulatoryrequirements.

Thebuyerwaseventuallynotapprovedbythelocalregulatorandthetransactioncouldnotbecompletedforreasonsbeyondthecontrolofthemanagement.Subsequenttotheyear-end,theGroupsignedamemorandumofunderstandingwithanewbuyer,alocalcommercialbank.Thecompletionofthedealissubjecttotheregulatoryapprovalsandconclusionoftheduediligenceprocess.Themanagementisconfidentthatthesaleprocesswillbecompletedandregulatoryapprovalswillbeobtained.Accordingly,theinvestmentinBurjBankLimitedcontinuestobeclassifiedasheld-for-sale.


72


www.bankalkhair.com

8. EQUITY-ACCOUNTED INVESTEES

31 December 2013

31 December 2012

BFCGroupHoldingsLtd. 94,337 93,205

t’azurCompanyB.S.C.(c) 13,052 12,801

107,389 106,006

TheBankhas43.36%stake(2012:43.36%)inBFCGroupHoldingsLtd.(“BFC”),acompanyincorporatedintheUnitedArabEmirates.BFCisaholdingcompanyofagroupofmoneychangersindifferentjurisdictions.BFCisengagedinbuyingandsellingforeigncurrenciesandtraveller’scheques,handlingofremittancebusinessandprovisionofotherexchangehouseservicesinbothlocalandforeigncurrencies.

TheBankhas25.86%stake(2012:25.86%)int’azurB.S.C.(c),anunlistedregionaltakafulcompanyincorporatedintheKingdomofBahrain.t’azur Company B.S.C (c) has a commitment to provide a Qard Hassan to the extent of the accumulated deficit in the participants’ fundofUS$32.5million at 31December2013 (31December2012:US$31.2million). TheGroup’s shareof the commitment isUS$8.4million (31December2012:US$8.1million).

Themovementonequity-accountedinvesteesisasfollows:

2013 2012

At 1 January 106,006 114,952

Acquisitionsduringtheyear 2,600 -

Shareofprofitsofequity-accountedinvestees 5,752 10,575

Shareofreservesofequity-accountedinvestees (33) 103

Transferredtoassetsheld-for-sale(note7) (2,600) (16,372)

Dividends received (4,336) (3,252)

At 31 December 107,389 106,006

SummarisedfinancialinformationofassociatesthathavebeenequityaccountednotadjustedforthepercentageownershipheldbytheGroup(basedonmostrecentauditedfinancialstatements/mostrecentmanagementaccounts):

2013 2012

Assets 336,647 324,670

Liabilities (94,200) (79,164)

Revenue 58,303 66,853

Profitfortheyear 14,208 19,428

9. INVESTMENT PROPERTY

31 December 2013 Carrying value Fair value

Land-KingdomofBahrain 17,706 18,748

Landandbuilding-KingdomofSaudiArabia 56,013 56,013

73,719 74,761

31 December 2012 Carrying value Fair value

Land-KingdomofBahrain 17,706 17,706

17,706 17,706

Duringtheyear,theGroupacquiredlandandbuildingsintheKingdomofSaudiArabia.Theprimaryobjectiveistoearnrental incomefromleaseofbuilding,accordingly,thelandandbuildingsareclassifiedasinvestmentproperty.Thefairvaluewasdeterminedbasedonvaluationbyexternalindependentvaluersandrecenttransactionprices.




10. OTHER ASSETS

31 December 2013

31 December 2012

Advance for purchase of investments - 7,145

Feesandexpensesrecoverable 4,776 4,314

Prepayments and advances 2,731 1,353

Receivablefromsaleofinvestmentsecurities - 11,900

Intangible assets 300 528

Others 1,505 4,516

9,312 29,756

Less:Provisionforimpairment (1,902) (3,768)

7,410 25,988

11. DUE TO FINANCIAL INSTITUTIONS

31 December 2013

31 December 2012

Placementsfromfinancialinstitutions 51,173 138,011

Bankfinancing - 15,110

51,173 153,121

InFebruary2013,theGrouprepaidthebankfinancing.Theaverageprofitrateonplacementsfromfinancialinstitutionswas3.58%perannum(2012:3.81%perannum).

12. DUE TO CUSTOMERS

ThisincludesdepositsfromcorporatecustomersonWakalabasiswithmaturitiesrangingfrom1monthto1year(2012:1monthto1year)andcarriesanaverageprofitrateof3.70%perannum(2012:2.74%perannum).

13. OTHER LIABILITIES

31 December 2013

31 December 2012

Provisionforlegalandprofessionalexpenses 820 6,800

Accruals and other provisions 1,765 1,564

Restructuring provision 419 419

Deal-relatedpayables 4,740 4,740

Staff-relatedpayables 2,512 2,240

Trade and other payables 8,554 9,215

18,810 24,978


74


www.bankalkhair.com

14. SHARE CAPITAL

31 December 2013

31 December 2012

Authorised:

750,000,000(2012:750,000,000)ordinarysharesofUS$1each 750,000 750,000

Issuedandfullypaidup:

186,070,234(2012:186,070,234)ordinarysharesofUS$1each,issuedagainstcash 186,070 186,070

20,371,807(2012:20,371,807)ordinarysharesofUS$1each,issuedinkind 20,372 20,372

1,419,873(2012:1,419,873)ordinarysharesofUS$1each,grantedtoemployees 1,420 1,420

207,862 207,862

15. INCOME FROM INVESTMENT SECURITIES

2013 2012

Dividend income - 28

Fairvaluegain/(loss)oninvestmentsecuritiescarriedatFVTIS 5,202 (13,386)

GainonsaleofinvestmentsecuritiescarriedatFVTE 424 1,011

(Loss)/gainonsaleofinvestmentsecuritiescarriedatFVTIS (76) 282

SukukIncome:

-Sukukprofit 1,008 1,307

-Gainonsaleofsukuk 674 82

7,232 (10,676)

16. FEES AND COMMISSION INCOME

2013 2012

Advisory fees - 75

Arrangement fees 3,791 1,135

Management fees 2,911 2,170

Brokerage fees 307 374

7,009 3,754

17. PROVISION FOR ZAKAH

ProvisionforZakahrepresentstheZakahfromoperationsofAlkhairCapitalSaudiArabia,calculatedinaccordancewiththeZakahRegulationsoftheKingdomofSaudiArabia.




18. (CHARGE) / REVERSAL OF IMPAIRMENT

2013 2012

Impairmentallowanceon:

Investment carried at fair value through equity - (1,650)

Financing receivables (3,024) (250)

Otherassets (297) -

Equipment - (2,000)

Reversalofimpairmentallowanceon:

Otherassets 1,304 5,000

(2,017) 1,100

19. COMMITMENTS AND CONTINGENCIES

31 December 2013

31 December 2012

Lease commitments 1,206 2,882

Guarantees 5,311 3,315

Financing 500 -

7,017 6,197

Litigations and claims

TheBankhasfiledanumberoflegalcasesagainsttheformerChiefExecutiveOfficerbeforetheCivilandCriminalCourtsoftheKingdomofBahrainandtheUK.AtthesametimetheformerCEOhasfiledacourtcaseintheBahrainicourtsforwrongfuldismissal.TheBahrainiCourtshaveruledinfavoroftheBankinanumberofthecivilandcriminalcases.ThecaseintheUKwasfiledbythebanktoremedythedamagesresultingfromdefamationandunlawfulconspiracy.Thecaseisstillinitsearlystages.

AnumberofemploymentclaimshavebeenfiledagainsttheBankbyformeremployees.TheBank’sexternallegalcounselhasconfirmedthattheBankhasstronggroundstosuccessfullydefenditselfagainsttheseclaims.Nodisclosureregardingcontingent liabilitiesarisingfromtheemploymentclaimshasbeenmadeasthedirectorsoftheBankbelievethatsuchdisclosuresmaybeprejudicialtotheBank’slegalposition.

TheGroup’sshareofcommitmentsarisingfromitsequity-accountedinvesteesisgiveninnote8.

20. FAIR VALUE

Fairvalueistheamountforwhichanassetcouldbeexchangedoranobligationsettledbetweenwellinformed,willingparties(sellerandbuyer)inanarm’slengthtransaction.UnderlyingthedefinitionoffairvalueisthepresumptionthattheGroupisagoingconcernwithoutanyintentionorrequirementtocurtailmateriallythescaleofitsoperationortoundertakeatransactiononadverseterms.Generallyacceptedmethodsofdeterminingfairvalueincludereferencetoquotedpricesandtheuseofvaluationtechniquessuchasdiscountedcashflowanalysis.

Valuation techniques

Fairvalueofquotedsecuritiesarederivedfromquotedmarketpricesinactivemarkets.Incaseofunquotedsecurities,thefairvalueisestimatedusingappropriatevaluationtechniques.Suchtechniquesmayincludeusingrecentarm’slengthmarkettransactions;referencetothecurrentfairvalueofanotherinstrumentthatissubstantiallythesame;discountedcashflowanalysisorothervaluationmodels.

The fair value of unquoted funds are based on net asset values which are determined by the fund manager using the quoted market prices of the underlying assets, if available, or other acceptable methods such as a recent price paid by another investor, the market value of a comparable companyorotherproprietaryvaluationmodels.

Thefairvalueofotherfinancialinstrumentsontheconsolidatedstatementoffinancialpositionarenotsignificantlydifferentfromthecarryingvaluesincludedintheconsolidatedfinancialstatements.


76


www.bankalkhair.com

20. FAIR VALUE (continued)

TheGroupusesthefollowinghierarchyfordetermininganddisclosingthefairvalueoffinancialinstrumentsbyvaluationtechnique:

Level 1 quoted(unadjusted)pricesinactivemarketsforidenticalassetsorliabilities;

Level 2othertechniquesforwhichallinputswhichhaveasignificanteffectontherecordedfairvalueareobservable,eitherdirectlyorindirectly;and

Level 3techniqueswhichuseinputswhichhaveasignificanteffectontherecordedfairvaluethatarenotbasedonobservablemarketdata.

Thefollowingtableshowsananalysisoffinancialinstrumentsrecordedatfairvaluebylevelofthefairvaluehierarchy:

31 December 2013 Level 1 Level 2 Level 3 Total

Investments carried at fair value through income statement 7,205 49,497 8,709 65,411

Investments carried at fair value through equity - - - -

7,205 49,497 8,709 65,411

31 December 2012 Level 1 Level 2 Level 3 Total

Investments carried at fair value through income statement 25,674 49,534 11,634 86,842

Investments carried at fair value through equity - - - -

25,674 49,534 11,634 86,842

Movements in level 3 financial instruments

ThefollowingtableshowsthereconciliationoftheopeningandclosingamountofLevel3financialassetswhicharerecordedatfairvalue:

At 1 January 2013

Total losses recorded in consolidated income

statement

Total gains recorded in

equity PurchasesSales/

transfersAt 31 December

2013

Investmentscarriedatfairvaluethrough:

-incomestatement 11,634 (3,000) - 75 - 8,709

-equity - - - - - -

11,634 (3,000) - 75 - 8,709

At 1 January2012

Total gains recorded in consolidated income

statement

Total gains recorded in

equity PurchasesSales/

transfersAt 31 December

2012

Investmentscarriedatfairvaluethrough:

-incomestatement 11,634 - - - - 11,634

-equity - - - - - -

11,634 - - - - 11,634

Transfers between level 1, level 2 and level 3

Therewerenotransfersbetweenthelevelsduringtheyearended31December2013.




20. FAIR VALUE (continued)

Thefollowingtableshowstheimpactonfairvalueoflevel3financialinstrumentsusingreasonablypossiblealternativeassumptions.

ForinvestmentsecuritiestheBankadjustedthediscountrate±1%andcarryingvalues±5%whereappropriate,whichisconsideredbytheBanktobewithinarangeofreasonablypossiblealternatives.

Carryingamount

Effects of reasonably possible alternative

assumptions on carrying amount

31 December 2013

Investments carried at fair value through income statement 8,709 435

31 December 2012

Investments carried at fair value through income statement 11,634 582

21. ASSETS UNDER MANAGEMENT

31 December 2013

31 December 2012

Proprietary 58,131 61,168

Clients 166,803 169,946

224,934 231,114

Proprietaryassetsareincludedintheconsolidatedstatementoffinancialpositionunder“investmentsecurities”.Clientassets,whichrepresentclientinvestments,aremanagedinafiduciarycapacitywithoutrecoursetotheGroupandarenotincludedintheconsolidatedstatementoffinancialposition.

22. RELATED PARTY TRANSACTIONS

Partiesareconsideredtoberelatedifonepartyhastheabilitytocontroltheotherpartyorexercisesignificantinfluenceovertheotherpartyinmakingfinancialandoperatingdecisions.RelatedpartiesincludesignificantshareholdersandentitiesoverwhichtheBankandshareholdersexercisesignificantinfluence,directors,membersofShari’ahSupervisoryBoardandexecutivemanagementoftheBank.

Compensation of key management personnel

Key management personnel of the Group comprise of the Board of Directors and key members of management having authority andresponsibilityforplanning,directingandcontrollingtheactivitiesoftheGroup.Thekeymanagementpersonnelcompensationduringtheyearisasfollows:

2013 2012

Shorttermemployeebenefits 2,482 3,153

Post-employmentbenefits 606 548

3,088 3,701


78


www.bankalkhair.com

22. RELATED PARTY TRANSACTIONS (continued)

Thesignificantrelatedpartytransactionsandbalancesincludedinthisconsolidatedfinancialstatementsareasfollows:

2013 2012

Associates

Significant shareholders/

entities in which directors have

interestSenior

managementOther

entities Associates

Significantshareholders/

entitiesinwhichdirectors have

interestSenior

managementOther

entities

AssetsFinancing receivables 7,281 - - 7,097 6,556 - - 7,108Investmentsecurities 56,581 - - 16,197 83,309 - - 11,181Assetsheld-for-sale 21,532 - - - 18,932 - - -Equity-accountedinvestees 107,389 - - - 106,006 - - -Otherassets 1,177 - 11 2,532 2,536 - 90 842

LiabilitiesDuetofinancialinstitutions 22,888 - - - 26,191 - - -Due to customers - - - 50,077 - - - 660Otherliabilities 149 754 606 221 152 1,284 548 66

2013 2012

Associates

Significant shareholders/

entities in whichdirectors have

interestSenior

managementOther

entities Associates

Significantshareholders/

entitiesinwhichdirectors have

interestSenior

managementOther

entities

Income / (expenses)Income from investmentsecurities

5,050 - - 695 (13,729) - - 1,199

Fees and commission 2,314 - - 2,646 2,067 - - 1,228Netfinanceincome/(expense) (674) - - 956 (663) - - 577Shareofprofitofequity- accounted investees 5,752 - - - 10,575 - - -Directors’ and Shari’ah board remunerationandexpenses - (874) - (33) - (818) - (52)

23. RISK MANAGEMENT

Risk isan inherentpartof theGroup’sbusinessactivities.TheGroup’s riskmanagementandgovernance framework is intended toprovideprogressive controls and continuousmanagement of themajor risks involved in theGroup’s activities. Risks aremanaged by a process ofidentification,measurementandmonitoring,andaresubjecttorisklimitsandothercontrols.TheprocessofriskmanagementiscriticaltotheGroup’soperationsandeachbusinessunitwithintheGroupisaccountablefortheriskexposuresrelatingtotheirresponsibilities.TheGroup’smainriskexposurecategoriesareInvestmentandCreditrisk,Marketrisk,LiquidityriskandOperationalrisks.- Riskidentification:TheGroup’sexposuretoriskthroughitsbusinessactivities,includinginvestmentinPrivateEquity,Brokerage,andCapitalMarkets,isidentifiedthroughtheGroup’sriskmanagementinfrastructure.

- Riskmeasurement:TheGroupmeasuresriskusingbasicriskmanagementpositionmethodologieswhichreflecttheGroup’sinvestmentrisks,foreignexchangeandprofitrateexposurerisks.TheBankreliesonbothquantitativeandqualitativeapproachesinquantifyingrisks.

- Riskmonitoring:TheGroup’sriskmanagementpoliciesandproceduresincorporaterespectivelimitsandtheGroup’sactivitiesareregularlyreviewed.TheBankhasalsoreviewedandstrengtheneditscorporategovernancearrangements.

- Riskreporting:TheGroupundertakesreportingofallcorerisksrelevanttoitsbusinessesonaconsolidatedbasis.Inlinewiththeboard-approvedrisk framework. The Bank has risk governance arrangements to oversee risk management and transaction approval and key governancecommitteesinclude;theGroupAssetandLiabilityCommittee(“ALCO”)whichoverseesliquidity,cashflowplanningandgeneralassetliabilitymanagement,theGroupRiskExecutiveCommittee(“REXCO”)whichoverseesriskmanagementacrossthegroupincludingreviewandapprovalof risk limits, credit facilities and key risk processes and the Investment and Post InvestmentManagement Committee (“IPIMC”) which isresponsible for review and approval of new investments, funding requirements, divestments and general investment processes.



23. RISK MANAGEMENT (continued)

Group Risk Framework and Governance

TheBoardofDirectors is ultimately accountable for the riskmanagementof theGroup. TheBoardhas advocatedawholly integrated riskmanagementprocesswithintheGroup,inwhichallbusinessactivitiesarealignedtotheriskframework.TheGroupRiskFrameworkestablishesGroupriskmanagementstandards,riskprocesses,structures,anddefinestheBank’sriskphilosophy.

Board of Directors

TheBoardofDirectorsisresponsiblefordefiningtheGroup’sriskappetitewithinwhichitmanagesitsriskexposuresandreviewstheGroup’scompliancewithdelegatedriskauthorities.

Audit Committee

TheAuditCommitteeisappointedbytheBoardofDirectorsandconsistsoffournon-executiveBoardmembers.TheAuditCommitteeassiststheBoardincarryingoutitsresponsibilitieswithrespecttoassessingthequalityandintegrityoffinancialreportingandoversightoftheInternalAuditfunction.


The Group’s Shari’ah Supervisory Board is vestedwith the responsibility of ensuring that the Group complies with the Shari’ah rules andprinciplesinitstransactions,activitiesandgeneralphilosophy.

Group Risk Executive Committee

Group Risk Executive Committee REXCO has the overall responsibility for ensuring that the Group develops appropriate risk policies andstrategiesfortherelevantbusinessactivities,andmakespreparationsforforthcomingregulatoryarrangementsinlinewithBaselCommitteerecommendations. ItoverseestheriskmanagementactivitiesoftheGroup,reviewsandapprovesriskmanagementprinciples, frameworks,policies,limits,processesandprocedures.ItisresponsibleforassessingfundamentalriskissueswithinthegeneraldevelopmentstrategyoftheGroup.

Internal Audit and Independent Review

Allkeyoperational,financialandriskmanagementprocessesareauditedbyInternalAuditaccordingtoriskbasedauditingstandards.InternalAudit examines the adequacy of the relevant policies and procedures and the Group’s compliance with internal policies and regulatoryguidelines.InternalAuditdiscussestheresultofallassessmentswithmanagementandreportsitsfindingsandrecommendationstotheAuditCommittee.TheInternalAuditrecommendationsaretrackedforresolutionviatheCommittee.

Group Asset and Liability Committee (ALCO)

TheGroupAssetandLiabilityCommitteeestablishesthefunding,liquidityandmarketriskpoliciesfortheGroup.Itiscomposedoftheheadsofkeybusinessareasandfinance,risk,operationsandcontrolareas.ALCO’sobjectivesaretomanagetheassetsandliabilitiesoftheGroup,determinethestatementoffinancialpositionmixandappropriateriskandreturnprofile.Itoverseesalltreasuryandcapitalmarketsactivitiesandallareasaffectedbyliquidityandmarketrisk.CashflowmanagementisamajorfocusofALCOandALCOregularlyreviewsthebusinesslineinvestmentplanstoensurethatsufficientfundingisinplace.ALCOensuresthattheappropriatemixofshortandlongtermfundingstrategiesaredevelopedinconjunctionwiththeGroup’streasuryandcapitalmarketsfunctions.

Risk Management

TheRiskManagement function is responsible fordesigningand implementingtheGroup’s risk framework, includingpolicies,processesandsystems.WiththeestablishmentoftheBoardRiskCommittee,theChiefRiskOfficernowreportsfunctionallytotheBoardRiskCommitteeandadministrativelytotheChiefExecutiveOfficer.RiskManagementconductsriskassessmentsofindividualtransactions(includingtheirrespectivecredit,investment,counterpartyandoperationalrisks),productsandservices.RiskManagementisresponsibleforensuringthattheGroup’sprocessescaptureallsourcesoftransactionriskandthatappropriatelimitmethodologiesaredevelopedforuseinthemanagementofbusinessrisk.InadditiontotheabovetheRiskFunctionalsosupportsinvestmentprocessesthroughouttheinvestmentcycleincludingperiodicvaluationandreporting.

Treasury Activities

TreasuryisresponsibleformanagingtheGroup’sdaytodayfunding,liquiditymanagement,foreignexchangeandprofitrateexposures,underthereviewofRiskManagementandthesupervisionofALCO.



23. RISK MANAGEMENT (continued)

Investment Monitoring and Reporting

Proprietaryinvestmentrisksareidentifiedandassessedviaextensiveduediligenceactivitiesconductedbytherespectivedepartments.ThisissupportedbyRiskManagementwhichundertakesanindependentriskassessmentofeveryinvestmenttransaction.Post-acquisitioninvestmentmanagementisrigorouslyexercised,mainlyviaboardrepresentationwithintheinvesteecompany,duringthelifeoftheinvestmenttransaction.

TheGrouphasexposuretothefollowingrisksfromitsuseoffinancialinstruments:

• credit risk

• liquidity risk

• market risk

• operationalrisk

TheinformationabouttheGroup’sexposuretoeachoftheaboverisks,itsobjectives,policiesandprocessesformeasuringandmanagingrisk,andtheBank’smanagementofcapitalisexplainedinnotes24to27and34.

24. CREDIT RISK

Credit Risk Policy Framework

TheBankhasaGroupCreditRiskPolicyframeworkestablishingGroupcreditriskappetite,creditriskorigination,underwritingandadministrationstandards.Thecreditpolicyarticulateskeycreditmarkets,minimumcriteriaforthegrantingofcredit,minimumrequirementsoncollateralanddefinesrolesandresponsibilitiesforcreditriskmanagement.Thepolicyprovidesaguidelinetobusinessunitswhenoriginatingcreditbusiness.

In order to strengthen the Bank’s credit risk management processes through a rigorous and consistent analysis of credit worthiness, the Bank introduced InternalCreditRatingModelscoveringcorporateentities,bankingcounterpartiesand realestateexposures.The ratingscomingoutoftheratingmodelsareusedtogetherwithothersupportinginformationontheobligor’screditworthinesswhenmakingcreditdecisions.

Credit Risk Management

CreditriskistheriskthattheGroupwillincuralossofprincipalorprofitearnedbecauseitscustomers,clientsorcounterpartiesfailtodischargetheir contractual obligations and arises principally from the Group’s balances with banks, placements with financial institutions, financingreceivables,investmentsecurities-sukukandotherreceivables.InstitutionalBankingproposeslimitsforitsinterbankplacementactivitiesandotherclientgroupsforreviewandapprovalbyREXCO.Further,RiskManagement independentlyanalysestheapplicationsandratesfortherespectivecounterparties.BasedonthisanindependentrecommendationisforwardedtotheREXCOforapproval.REXCOperiodicallyreviewstheselimitsforappropriatenessinprevailingmarketconditions.

Thetablebelowshowsthemaximumexposuretocreditriskforthecomponentsoftheconsolidatedstatementoffinancialposition.Thereisnosignificantuseofmasternettingandcollateralagreements.

Maximum exposure2013

Maximumexposure2012

On balance sheet

Balances with banks 15,817 7,966

Placementswithfinancialinstitutions 74,390 63,733

Financing receivables 52,309 86,623

Investmentsecurities-Sukuk 13,775 26,063

Otherassets 4,479 23,359

Off balance sheet

Guarantees 5,311 3,315

Financing 500 -

166,581 211,059

(AmountsinUS$thousands)




24. CREDIT RISK (continued)

Risk Exposure Concentration

Riskconcentrationariseswhenanumberofcounterpartiesareengagedinsimilarbusinessactivities,oractivitiesinthesamegeographicregion,orhavesimilareconomicfeaturesthatwouldcausetheirabilitytomeetcontractualobligationstobesimilarlyaffectedbychangesineconomic,politicalorotherconditions.ConcentrationsindicatetherelativesensitivityoftheGroup’sperformancetodevelopmentsaffectingaparticularindustryorgeographicallocation.

Inordertoavoidexcessiveconcentrationsofrisk,theGroup’spoliciesandproceduresincludeguidelinestofocusonmaintainingadiversifiedportfolio.Inlinewithregulatoryrequirements,thebankhasagrouplevelLargeExposurePolicywhichdetailstheBank’sapproachinmanagingconcentrationrisktosectors,assetclasses,singleobligorsandcountriesincludingdefiningspecificlimits.

Concentrationofrisksismanagedbycounterparty,bygeographicalregionandbyindustrysector.Themaximumcreditexposuretoanyclient,orcounterparty,orgroupofcloselyrelatedcounterpartiesasof31December2013wasUS$39.2million(2012:US$30.8million),relatingto“placementwithfinancialinstitutionandfinancingreceivables”.

Geographical Exposure Distribution

TheanalysisbygeographicalregionoftheGroup’sfinancialassetshavingcreditriskexposureisasfollows:

Total Assets

Off-balancesheet

Total2013

Total2012

Region

Bahrain 37,112 - 37,112 22,761OtherMiddleEast 65,472 500 65,972 109,237North America 385 5,000 5,385 4,145AsiaPacific 52,790 - 52,790 69,206Europe 5,011 311 5,322 5,710

Total 160,770 5,811 166,581 211,059

Industry Sector Exposure

Thedistributionofassetsandoff-statementoffinancialpositionitemsbyindustrysectorisasfollows:

Total Assets

Off-balancesheet

Total2013

Total2012

Industry Sector

Bankingandfinance 104,585 311 104,896 95,262Industrial 9,858 500 10,358 13,706Realestateandconstruction 16,585 - 16,585 43,384Technology 3,501 5,000 8,501 6,512In-housefunds 894 - 894 2,381Trade 22,118 - 22,118 41,670Government 3,229 - 3,229 6,775Individual - - - 1,369

Total 160,770 5,811 166,581 211,059

Collateral and other credit enhancements

TheGrouputilizescollateralandothercreditenhancementsmostlyonitscreditfacilities,inlinewithShari’ahrequirements.BeforetakinganyformofcollateraltheBankpre-assessesimpedimentsthatmayrestrictaccessibilitytocollateralshouldtheneedariseaswellasacceptabilityfromaShari’ahperspective.InthisrespecttheBankwillformallyagreewiththecustomeratthetimeofsigningtheofferletterontheusage,redemptionandutilizationofcollateralwhenthecustomer/counterpartydefaults.Inthepastyear,theBankhasobtainedcollateralincludingshareholders’ personal guarantees, cash, real estate, unlisted equity shares and debentures. The Bank’s credit policy discourages takingcollateralvaluewherethereispositivecorrelationbetweencollateralvalueandobligor’sabilitytopay.


82


www.bankalkhair.com

24. CREDIT RISK (continued)

Credit quality per class of financial assets

TheGroupdidnotapplyastandardcreditratingtoitsinvestmentbusiness,astheGroupassessedcreditqualityaccordingtothepoliciesoftherespectivebusinessareas.ManagementconsidersthecreditqualityoftheGroup’sfinancialassetstobeofstandardqualityasof31December2013.Followingisananalysisofcreditqualitybyclassoffinancialassets:

2013Neither past due

nor impairedPast due but not

impairedIndividually

impairedImpairments/

provisions Total

Balances with banks 15,817 - - - 15,817Placementswithfinancialinstitutions 74,390 - - - 74,390Financing receivables 52,609 - 2,974 (3,274) 52,309Investmentsecurities-Sukuk 13,775 - - - 13,775Otherassets 3,919 560 1,902 (1,902) 4,479Guarantees 5,311 - - - 5,311Financing 500 - - - 500

Total 166,321 560 4,876 (5,176) 166,581

Exposuresthatarepastduebutnotimpairedareeitherpastdueforlessthan90daysandthefinancialconditionofthecustomerissound,orhasadequateunimpairedcollateralcoverage.Provisioningisdrivenbytheperformanceofthecustomeragainstlaiddowntermsandconditionsofthefacility,internalcreditgradingandclassificationsystemcalculatedonnetexposureafterdeductingthediscountedvalueofrecoverablecollateralandanydisposalcosts.

2012Neither past due

nor impairedPast due but not

impairedIndividually

impairedImpairments/

provisions Total

Balances with banks 7,966 - - - 7,966

Placementswithfinancialinstitutions 63,733 - - - 63,733

Financing receivables 86,873 - - (250) 86,623

Investmentsecurities-Sukuk 26,063 - - - 26,063

Otherassets 8,676 13,314 5,137 (3,768) 23,359

Guarantees 3,315 - - - 3,315

Total 196,626 13,314 5,137 (4,018) 211,059

Ageinganalysisofpastduebutnotimpairedbyclassoffinancialassets:

2013Less than120 days

Less than365 days

More than365 days Total

Otherassets 177 279 104 560

2012Less than120 days

Less than365 days

More than365 days Total

Otherassets 11,971 1,224 119 13,314




25. LIQUIDITY RISK MANAGEMENT

LiquidityriskistheriskthattheGroupwillencounterdifficultyinmeetingobligationsassociatedwithitsfinancialliabilitiesthataresettledbydeliveringcashoranotherfinancialassets.

ThekeyfeaturesoftheGroup’sliquiditymethodologyare:

- TheGroup Asset and Liability Committee (“ALCO”) is responsible for liquiditymonitoring, cash flow planning and general asset liabilitymanagement.

- InaccordancewiththeBaselrecommendationsonliquiditymanagement,theGroupmeasuresliquidityaccordingtotwocriteria:“normalbusiness”,reflectingday-to-dayexpectationsregardingthefundingoftheGroup;and“crisisscenario”,reflectingsimulatedextremebusinesscircumstancesinwhichtheGroup’ssurvivalmaybethreatened.

- TheGroup’s liquiditypolicy istoholdsufficient liquidassetstocover itscommittedstatementoffinancialpositionrequirements,plus itsbudgetedexpensesfortheliquidityhorizonanditsforecastinvestmentcommitmentsovertheliquidityhorizon.

Analysis of financial liabilities

ThetablebelowsummarisesthematurityprofileoftheGroup’sfinancialliabilitiesbasedoncontractualundiscountedrepaymentobligations.

Gross undiscounted cash flows

Carryingvalue

Less than3 months

3 to12 months

Over1 year Total

At 31 December 2013

DuetofinancialInstitutions 30,723 20,749 - 51,472 51,173

Due to customers 65,411 156,720 - 222,131 217,594

Otherliabilities 11,236 - 2,430 13,666 13,666

Total financial liabilities 107,370 177,469 2,430 287,269 282,433

Grossundiscountedcashflows

Carryingvalue

Less than3 months

3 to12 months

Over1 year Total

At 31 December 2012

DuetofinancialInstitutions 130,521 23,552 - 154,073 153,121

Due to customers 42,006 26,522 - 68,528 68,176

Otherliabilities 17,508 - 2,233 19,741 19,741

Totalfinancialliabilities 190,035 50,074 2,233 242,342 241,038


84


www.bankalkhair.com

25. LIQUIDITY RISK MANAGEMENT (continued)

ThetablebelowshowsthecontractualexpirybymaturityoftheGroup’scommitments.

On demand 3 to 12 months Over 1 year Carrying value

31 December 2013

Lease Commitments - 1,079 127 1,206

Guarantees 5,311 - - 5,311

Financing 500 - - 500

Total 5,811 1,079 127 7,017

Ondemand 3 to 12 months Over1year Carrying value

31 December 2012

Lease Commitments - 1,676 1,206 2,882

Guarantees 3,315 - - 3,315

Total 3,315 1,676 1,206 6,197

26. MARKET RISK MANAGEMENT

Marketriskistheriskthatthefairvalueorfuturecashflowsoffinancialinstrumentswillfluctuateduetoadversechangesinmarketvariablessuchasprofitrates,foreignexchangerates,equitypricesandcommodities.TheGroupclassifiesexposurestomarketriskintoeithertradingornon-tradingportfolios.TheGroupdoesnotcurrentlyengage in tradingactivity.Non-tradingpositionsaremanagedandmonitoredusingsensitivityanalysis.

Market Risk: Non-trading

Profit rate risk

Profitrateriskarisesfromthepossibilitythatchangesinprofitrateswillaffectfuturecashflowsorthefairvaluesofthefinancialinstruments.TheBoardhassetlimitsonprofitratepositionsbymaturity.TheGroupcurrentlyhaslimitedexposuretoprofitraterisk.TheGroup’sassetsandliabilitiesthatareexposedtoprofitrateriskinclude:placementswithfinancialinstitutions,financingreceivables,investmentsinsukukandduetofinancialandnon-financialinstitutions.

Thefollowingtabledemonstratesthesensitivitytoareasonablepossiblechangeinprofitratesby200bps,withallothervariablesheldconstant.Theeffectofdecreasesinprofitrateisexpectedtobeequalandoppositetotheeffectoftheincreasesshown.

2013 2012

Balance

Change inprofit rate

(+/-)

Effect onnet profit

(+/-) Balance

Change inprofitrate

(+/-)

Effectonnetprofit

(+/-)

Assets

Placementswithfinancialinstitutions 74,390 200 1,459 63,733 200 1,246

Financing receivables 52,309 200 992 86,623 200 1,523

Investmentsecurities–Sukuk 13,775 200 13 26,063 200 19

Liabilities

Duetofinancialinstitutions 51,173 200 (867) 153,121 200 (2,609)

Due to customers 217,594 200 (2,332) 68,176 200 (1,135)

Total (735) (956)




26. MARKET RISK MANAGEMENT (continued)

Currency risk

Currencyriskistheriskthatthevalueofafinancialinstrumentwillfluctuateduetoadversechangesinforeignexchangerates.TheBoardhassetlimitsonpositionsbycurrency.Positionsaremonitoredregularlytoensurethatpositionsaremaintainedwithinestablishedlimits.

ThetablebelowindicatesthecurrenciestowhichtheGrouphassignificantexposure.Theanalysisshowstheimpactofa20%movementinthecurrencyrateagainsttheUnitedStatesDollar,withallothervariablesheldconstantontheconsolidatedstatementofincomeandequity.Theeffectofdecreasesinthecurrencyratesisexpectedtobeequalandoppositetotheeffectoftheincreasesshown.

2013 2012

Exposure(USD

equivalent)

Effect onnet profit

(+/-)

Effect onequity

(+/-)Exposure

(US$equivalent)

Effectonnetprofit

(+/-)

Effectonequity(+/-)

Currency

KuwaitiDinar (10,423) (2,085) - (12,160) (2,432) -

Turkish Lira 4,718 264 680 7,074 322 1,093

Malaysian Ringgit 85 17 - 42 8 -

Euro 27 5 - 141 28 -

Jordanian Dinar * 50,323 10,065 - 23,732 4,746 -

Sterling Pounds 77 15 - 157 31 -

* JordanianDinarisofficiallypeggedtoInternationalMonetaryFund(IMP)specialdrawingrights(SDR’s).Inpracticethisisfixedat1US$=0.709JODmostofthetimes.

Equity price risk

Equitypriceriskistheriskthatthefairvalueofequitiesdecreasesastheresultofadversechangesinthelevelsofequitypricesandthevalueofindividualstocks.EquitypriceriskarisesfromtheGroup’sinvestmentportfolio.TheGroupconductssignificantinvestmentactivityinprivateequity,mainlyinunquotedentities.TheGroupmanagesthisriskthroughdiversificationofitsinvestmentsintermsofgeographicaldistributionandindustryconcentrationbyarrangingrepresentationontheBoardofDirectorswithintheinvesteecompany,whereverpossible.Investmentsaremanagedwithinmaximumconcentrationrisklimits,approvedbytheBoardofDirectorsoftheBank.

Sensitivity analysis

Unquotedsecurities-Investmentsecuritiescarriedatfairvaluethroughincomestatement:

Theeffectonprofitasaresultofachangeinthefairvalueofequityinstrumentsat31December2013duetoareasonablepossiblechange(i.e.+/-15%)inthevalueofindividualinvestments,withallothervariablesheldconstant,isUS$8.8million(2012:US$9.2million).Theeffectofdecreaseinthevalueofindividualinvestmentsisexpectedtobeequalandoppositetotheeffectofanincrease.

Prepayment risk

Prepaymentrisk istheriskthattheGroupwill incurafinancial lossbecause itscustomersandcounterpartiesprepayorrequestrepaymentearlierthanexpected.TheGroupisnotexposedtoanysignificantprepaymentrisk.

27. OPERATIONAL RISK

Operational risk is theriskofunexpected lossesresultingfrominadequateor failed internalcontrolsorprocedures,systemsfailures, fraud,businessinterruption,compliancebreaches,humanerror,managementfailureorinadequatestaffing.Whencontrolsfailtoperform,operationalriskscancausedamagetoreputation,havelegalorregulatoryimplicationsorleadtofinancialloss.

Whileoperationalriskscannotbeentirelyeliminated,theyaremanagedandmitigatedbyensuringthatappropriateinfrastructure,controls,systems,proceduresandtrainedandcompetentpeopleareinplacethroughouttheGroup.


86


www.bankalkhair.com

28. MATURITY ANALYSIS OF ASSETS AND LIABILITIES

Thetablebelowshowsananalysisofassetsandliabilitiesanalysedaccordingtowhentheyareexpectedtoberecoveredorsettled.

31 December 2013Up to

1 month1 to

3 months3 to

6 months6 to

12 monthsTotal up to

1 yearOver

1 year Undated Total

ASSETSCash and balances with banks 15,836 - - - 15,836 - - 15,836Placementswithfinancialinstitutions 73,327 1,063 - - 74,390 - - 74,390Financing receivables 8,976 7,646 19,659 10,028 46,309 6,000 - 52,309Investmentsecurities 79 91 8,844 22,687 31,701 47,485 - 79,186Assetsheld-for-sale - 21,532 - 195,232 216,764 - - 216,764Equity-accountedinvestees - - - - - - 107,389 107,389Investmentproperties - - - - - - 73,719 73,719Otherassets - 6,627 - 483 7,110 300 - 7,410Equipment - - - - - - 1,587 1,587

Total assets 98,218 36,959 28,503 228,430 392,110 53,785 182,695 628,590

LIABILITIESDuetofinancialinstitutions 12,342 18,246 19,875 710 51,173 - - 51,173Due to customers 16,829 48,256 78,613 73,896 217,594 - - 217,594Liabilitiesrelatedtoassetsheld-for-sale - - - 92,427 92,427 - - 92,427Otherliabilities - 11,236 - 5,144 16,380 2,430 - 18,810

Total liabilities 29,171 77,738 98,488 172,177 377,574 2,430 - 380,004

Commitments 5,811 64 64 951 6,890 127 - 7,017

Net liquidity gap 63,236 (40,843) (70,049) 55,302 7,646 51,228 182,695 241,569

Net cumulative gap 63,236 22,393 (47,656) 7,646 7,646 58,874 241,569

31 December 2012Upto

1 month1 to

3 months3 to

6 months6 to

12 monthsTotal up to

1 yearOver

1 year Undated Total

ASSETSCash and balances with banks 7,985 - - - 7,985 - 7,985Placementswithfinancialinstitutions 63,489 244 - - 63,733 - 63,733Financing receivables 9,197 8,968 18,506 49,952 86,623 - 86,623Investmentsecurities 154 93 33,230 1,550 35,027 77,878 112,905Assetsheld-for-sale - 18,932 - - 18,932 - 18,932Equity-accountedinvestees - - - - - - 106,006 106,006Investmentproperties - - - - - - 17,706 17,706Otherassets 15 25,400 - - 25,415 573 - 25,988Equipment - - - - - - 2,277 2,277

Total assets 80,840 53,637 51,736 51,502 237,715 78,451 125,989 442,155

LIABILITIESDuetofinancialinstitutions 61,380 68,551 21,881 1,309 153,121 - - 153,121Due to customers 23,626 18,260 25,679 611 68,176 - - 68,176Otherliabilities - 17,507 - 5,238 22,745 2,233 - 24,978

Totalliabilities 85,006 104,318 47,560 7,158 244,042 2,233 - 246,275

Commitments 3,315 362 362 952 4,991 1,206 - 6,197

Net liquidity gap (7,481) (51,043) 3,814 43,392 (11,318) 75,012 125,989 189,683

Netcumulativegap (7,481) (58,524) (54,710) (11,318) (11,318) 63,694 189,683



29. SEGMENT INFORMATION

Operating segments are reported in accordancewith internal reporting provided to ExecutiveManagement (the chief operating decision-maker),whichisresponsibleforallocatingresourcestothereportablesegmentsandassessesitsperformance.AlloperatingsegmentsusedbytheGroupmeetthedefinitionofareportablesegmentunderFAS22.

Duringtheyear,theGrouphaschangeditsreportablesegmentsasaresultoftherecentrestructuringofitsbusinessandin-linewiththecurrentinternal reporting to theChiefOperatingdecision-maker for segmentmeasurementandmonitoring.Currently, theGroup isorganised intobusinessunitsbasedontheirnatureofoperationsandservicesandhasthreereportableoperatingsegmentswhichareasfollows:

Investment Banking & Alkhair Capital Menkul Degerler A.S

The Group’s Investment banking business is engaged in transaction origination and structuring,investment, placement to third-party investors, restructuring and managing portfolio companies.This segment focuseson stable companies,historically revenue-generatingwithpositiveprofitability,requiringgrowthcapitalorpartialexits.Thesegmentfocusesonspecificsectorsandgeographies,whilstavoidingstart-ups,venturecapital,andgreenfieldinvestments.Thesegmenttargetsbusinessesintheoil&gasservices; industrialservices;buildingmaterials; logistics;andagri-business;specifically intheMENAregionincludingTurkey.

AlkhairCapitalMenkulDegerlerA.SoriginatesShari’ahcompliantPEtransactions,especiallyproprietarydeals fromdirectcontactswithawiderangeof localsources.TheTurkeyofficealsoprovidesapost-investmentmanagementservices(postmanagementuntilsuccessfulexit,advisoryforanIPOortradesale)toco-investors.

ThebusinessmanagestheBank’sGlobalPrivateEquityFund.ItalsosourcesandmanagesinvestmentsonbehalfoftheBank’sStrategicAcquisitionFund.

Alkhair International Islamic Bank Malaysia Berhad

Alkhair International Islamic Bank Malaysia Berhad was established in 2004 to source investmentopportunitiesintheFarEastandmonitortheperformanceoftheacquiredcompaniesonbehalfoftheBankandinvestorsandtoestablishdistributionchannelsfortheGroup.

Alkhair Capital Saudi Arabia Alkhair Capital Saudi Arabia was incorporated in March 2009 and registered with Capital Markets Authority.ItsprincipalactivitiesareAssetManagement,CorporateFinance&InvestmentbankingandBrokerage.

Informationregardingtheresultsofeachreportablesegmentisincludedbelow.Inter-segmentpricingisdeterminedonanarm’slengthbasis.Managementmonitorstheoperatingresultsofitsbusinessunitsseparatelyforthepurposeofmakingdecisionsaboutresourceallocationandperformanceassessment.


88


www.bankalkhair.com

29. SEGMENT INFORMATION (continued)

For the year ended 31 December 2013

Investment Banking & Alkhair Capital

Menkul Degerler A.S

Alkhair International Islamic Bank

Malaysia BerhadAlkhair Capital

Saudi ArabiaInter-

company Total

External revenueNetfinanceexpense (4,054) 2,848 - - (1,206)Incomefrominvestmentsecurities 5,503 1,641 88 - 7,232Fees and commission 3,060 2,162 1,787 - 7,009Shareofprofitofequity-accountedinvestees 5,752 - - - 5,752Gainonacquisitionofassetsheld-for-sale 14,453 - - - 14,453Otherincome 1,370 (23) 81 - 1,428Inter-segmentincome (3,250) 586 2,664 - -

Total income 22,834 7,214 4,620 - 34,668

Totaloperatingexpenses (22,319) (4,016) (4,904) - (31,239)

(Charge) / reversal of impairment 1,007 (3,024) - - (2,017)

ProvisionforZakah - - (145) - (145)

Incomefromassetsheld-for-sale 3,472 - - - 3,472

Profit / (Loss) for the year 4,994 174 (429) - 4,739

Equity-accountedinvestees 107,389 - - - 107,389

Capitalexpenditure 24 27 56,013 - 56,064

Segment assets 451,611 132,392 68,382 (23,795) 628,590

Segmentliabilities 295,006 102,695 6,098 (23,795) 380,004

For the year ended 31 December 2012

Investment Banking&AlkhairCapital

MenkulDegerlerA.S

AlkhairInternational Islamic Bank

Malaysia BerhadAlkhair Capital

Saudi ArabiaInter-

company Total

ExternalrevenueNetfinanceexpense (2,457) 3,385 - - 928Incomefrominvestmentsecurities (11,707) 1,031 - - (10,676)Fees and commission 2,229 1,145 380 - 3,754Shareofprofitofequity-accountedinvestees 10,575 - - - 10,575Otherincome 685 24 - - 709Inter-segmentincome (3,267) 317 2,950 - -

Total income (3,942) 5,902 3,330 - 5,290

Totaloperatingexpenses (32,483) (4,479) (7,536) - (44,498)

Reversal of impairment 1,350 (250) - - 1,100

Income from assets held for sale anddiscontinuedoperations 64 - - - 64

ProvisionforZakah - - (1,719) - (1,719)

(Loss)/Profitfortheyear (35,011) 1,173 (5,925) - (39,763)

Equity-accountedinvestees 106,006 - - - 106,006

Capitalexpenditure 255 - 20 - 275

Segment assets 272,538 185,567 70,099 (86,049) 442,155

Segmentliabilities 167,888 156,990 7,446 (86,049) 246,275




29. SEGMENT INFORMATION (continued)

Geographic segment information:

TheGroupoperatesinfivegeographicmarkets:Bahrain,OtherMiddleEast,NorthAmerica,AsiaPacificandEurope.ThefollowingtablesshowthedistributionoftheGroup’stotalincomeandnon-currentassetsbygeographicalsegments.

31 December 2013 BahrainOther

Middle EastNorth

America Asia Pacific Europe Total

Total income 7,897 19,073 - 7,214 484 34,668

Net income (11,667) 17,496 - 174 (1,264) 4,739

Non-currentassets* 18,633 56,270 - 194 209 75,306

31 December 2012 BahrainOther

Middle EastNorth

America AsiaPacific Europe Total

Total income 1,877 (2,091) - 4,229 1,275 5,290

Net loss (25,801) (11,346) (237) (500) (1,879) (39,763)

Non-currentassets* 18,934 377 - 365 307 19,983

* includes equipment and investment property

30. SHARI’AH SUPERVISORY BOARD

TheBank’sShari’ahSupervisoryBoardconsistsofsixIslamicscholarswhoreviewthattheBankiscompliantwithgeneralShari’ahprinciplesandspecificfatwas,rulingsandguidelinesissued.TheirreviewincludesexaminationofevidencerelatingtothedocumentationandproceduresadoptedbytheBanktoensurethatitsactivitiesareconductedinaccordancewithIslamicShari’ahprinciples.

31. EARNINGS AND EXPENSES PROHIBITED BY SHARI’AH

TheGroupdidnotreceiveanysignificantincomeorincursignificantexpensesthatwereprohibitedbytheShari’ah.

32. SOCIAL RESPONSIBILITIES

TheGroupdischargesitssocialresponsibilitiesthroughdonationstogoodfaithcharityfunds.

33. ZAKAH

TheBankisnotobligedtopayZakah.PaymentofZakahistheresponsibilityoftheshareholdersoftheBank.ZakahpayablebyshareholdersontheirholdingsintheBankiscalculatedonthebasisofamethodprescribedbytheBank’sShari’ahSupervisoryBoard.Zakahpayablebytheshareholdersinrespectoftheyearended31December2013wasUS$0.04887centspershare(2012:US$0.0283centspershare).

34. CAPITAL MANAGEMENT

TheCentralBankofBahrain(CBB)setsandmonitorscapitalrequirementsfortheBankasawhole.InimplementingcurrentcapitalrequirementsCBBrequirestheBanktomaintainaprescribedratiooftotalcapitaltototalrisk-weightedassets.CBBcapitaladequacyregulationsarebasedontheprinciplesofBaselIIandIFSBcapitaladequacyguidelines.

TheBank’sregulatorycapitalisanalysedintotwotiers:

• Tier 1 capital, includes ordinary share capital, disclosed reserves including share premium, general reserves, legal / statutory reserve as well asretainedearningsafterdeductionsforgoodwillandotherregulatoryadjustmentsrelatingto itemsthatare included inequitybutaretreateddifferentlyforcapitaladequacypurposes.

• Tier 2 capital, includes interim retained profits reviewed by the auditors and an allowed portion profit equalisation reserve (PER) andinvestmentriskreserves(IRR).AsperCBB,thePER&IRRcanbeuptoamaximumamountequaltothecapitalchargepertainingto30%oftheriskweightedassetsfinancedbyunrestrictedinvestmentaccounts.


90


www.bankalkhair.com

34. CAPITAL MANAGEMENT (continued)

Certainlimitsareappliedtoelementsofthecapitalbaseinlinewithregulatoryrequirements.Tier1capitalshouldrepresentatleasthalfofthetotaleligiblecapital,i.e.,Tier2capitalislimitedto100%ofTier1capital.ThelimitonTier2capitalisbasedontheamountofTier1capitalafteralldeductionsofinvestmentspursuanttoPrudentialConsolidationandDeductionRequirements(PCD)ModuleoftheCBB.ThePCDModulesetsouttheregulatoryrulesforprudentialconsolidation,pro-rataconsolidationordeductionwheretheowncontrollingorsignificantminoritystakesinregulatedfinancialentities,insuranceentitiesandhavesignificantexposurestoinvestmentincommercialentities.ItalsosetsouttheframeworkfortheprudentialdeductionsfromcapitalforvariousinstancesincludingexposurestocounterpartiesexceedingthelargeexposurelimitsassetoutbyCBB.

Bankingoperationsarecategorisedaseither tradingbookorbankingbook,andrisk-weightedassetsaredeterminedaccording tospecifiedrequirementsthatseektoreflectthevaryinglevelsofriskattachedtoassetsandoff-balancesheetexposures.

TheprimaryobjectivesoftheGroup’scapitalmanagementaretoensurethattheGroupcomplieswithregulatorycapitalrequirementsandthattheGroupmaintainsadequatecapitalratiosinordertosupportitsbusinessandtomaximiseshareholders’value.

TheGroupmanagesitscapitalstructureandmakesadjustmentstoitinlightofchangesineconomicconditionsandtheriskcharacteristicsofitsactivities.Inordertomaintainoradjustthecapitalstructure,theGroupmayadjusttheamountofdividendpaymenttoshareholders,returncapitaltoshareholdersorissuenewcapital.Nochangesweremadeintheobjectives,policiesandprocessesfromthepreviousyears.

TheGrouphasadoptedthestandardisedapproachforcreditriskandmarketriskandbasicindicatorapproachforoperationalriskregulatorycapitalcomputationpurposesundertheCBBcapitaladequacyframework.TheGroupdoesnothaveBaselIIpermissiblecreditriskmitigantsagainstanyofitscreditexposures.

TheGroup’scapitaladequacyratio,calculatedinaccordancewiththecapitaladequacyrulesdeterminedbytheCentralBankofBahrain,isasfollows:

2013 2012

Regulatorycapitalbase:

Tier 1 capital 65,382 91,515

Tier 2 capital - -

Total regulatory capital 65,382 91,515

Risk-weighted assets 430,348 405,597

Tier1capitaladequacyratio 15.19% 22.56%

Totalcapitaladequacyratio 15.19% 22.56%

TheGroup has compliedwith the externally imposed capital requirements set by the regulator for its consolidated capital adequacy ratiothroughouttheyear.

Capital allocation

The allocation of capital between specific operations and activities is primarily driven by regulatory requirements. The Bank’s capitalmanagementpolicy seeks tomaximise returnon riskadjustedwhile satisfyingall the regulatory requirements.TheBank’spolicyoncapitalallocationissubjecttoregularreviewbytheBoard.

35. COMPARATIVES

Certainprioryearamountshavebeenregroupedtoconformtocurrentyear’spresentation.Suchregroupingdidnotaffectpreviouslyreportedlossorequity.

Bank Alkhair BSC(c)

POBox31700ManamaKingdom of Bahrain

T:(+973)17566000F:(+973)17566001

E:[email protected]:www.bankalkhair.com

Group Directory

Alkhair International Islamic Bank Berhad

Level 38, Menara Standard CharteredJalan Sultan Ismail50250 Kuala LumpurMalaysia

T:(+6)0327111606F:(+6)0327110787

E:[email protected]:www.alkhairmalaysia.com

Alkhair Capital Saudi Arabia

POBox694102nd Floor, North TowerSky Towers, King Fahd RoadOlayaDistrict,Riyadh11547Kingdom of Saudi Arabia

T:(+966)112191180F:(+966)112191270W:www.alkhaicapital.com.sa

Alkhair Capital Menkul Değerler A.Ş.

KöybaşıCad.İskeleÇıkmazı,No:834464 YeniköyIstanbulTurkey

T:+902123598500F:+902123236656

E:[email protected]:www.alkhaircapital.com.tr

Documents

Bank Alkhair - Where Vision Inspires Progressbankalkhair.com/media/document/Annual Report 2013.pdf24 Investment Portfolio 26 Risk Management Review 35 Corporate Governance Review