ANNUAL REPORT 2008 · Ebrahim Hussain Ebrahim Board Member Hesham Al Emadi Board Member Khalid...

ANNUAL REPORT 2008

Charting the Course to Create and Capture Value in the Global Energy Sector

First Energy Bank looks forward to building a solid and diversified portfolio of energy projects during the course of 2009 and beyond

FIRST ENERGY BANK ANNUAL REPORT 2008 1

Contents

About First Energy Bank 3

Board of Directors 4

Sharia’a Supervisory Board 6

Executive Management 8

Chairman’s Letter to Shareholders 11

Message from the Acting CEO 15

Financial Highlights 16

Business Activities 18

Impact on the Community 20

Corporate Governance 23

Financial Statements 27

Risk and Capital Management 47

2 FIRST ENERGY BANK ANNUAL REPORT 2008

First Energy Bank B.S.C. (c)

First Energy Bank B.S.C. (c) (“FEB” or the “Bank”) is an Islamic investment bank licensed by the Central Bank of Bahrain and headquartered in Manama, Kingdom of Bahrain.

FEB’s founders believe that the global energy sector and the Middle East and North Africa (MENA) region offer excellent opportunities for private equity and Islamic financial investment. First Energy Bank offers investors unique and specialized opportunities that capitalize on the MENA region’s status as the center for world energy.

The Bank focuses on investments in the development, production, transportation, storage, refining and distribution of hydrocarbons, as well as on oilfield services and energy sector technologies. FEB also explores opportunities to invest in the development of power generation capacity and renewable energy technologies.

The Bank operates in accordance with Islamic Sharia’a principles as a financial partner in project development, joint ventures, mergers and acquisitions and the purchase of assets and asset portfolios.

FEB was established with authorized share capital of US$ 2 billion, consisting 2 billion ordinary shares with a par value of US$ 1 each. FEB issued share capital of US$ 1 billion which was fully subscribed and paid-up through a private placement by Gulf Finance House (GFH). The Bank’s shareholders include financial institutions, a range of other organizations and individuals with interests in the energy sector from Bahrain, the United Arab Emirates, Libya, Saudi Arabia, and other countries in the region.



First Energy Bank B.S.C. (c) (“FEB” or the “Bank”) is an Islamic investment bank licensed by the Central Bank of Bahrain and headquartered in Manama, Kingdom of Bahrain.

FEB’s founders believe that the global energy sector and the Middle East and North Africa (MENA) region offer excellent opportunities for private equity and Islamic financial investment. First Energy Bank offers investors unique and specialized opportunities that capitalize on the MENA region’s status as the center for world energy.

The Bank focuses on investments in the development, production, transportation, storage, refining and distribution of hydrocarbons, as well as on oilfield services and energy sector technologies. FEB also explores opportunities to invest in the development of power generation capacity and renewable energy technologies.

The Bank operates in accordance with Islamic Sharia’a principles as a financial partner in project development, joint ventures, mergers and acquisitions and the purchase of assets and asset portfolios.

FEB was established with authorized share capital of US$ 2 billion, consisting 2 billion ordinary shares with a par value of US$ 1 each. FEB issued share capital of US$ 1 billion which was fully subscribed and paid-up through a private placement by Gulf Finance House (GFH). The Bank’s shareholders include financial institutions, a range of other organizations and individuals with interests in the energy sector from Bahrain, the United Arab Emirates, Libya, Saudi Arabia, and other countries in the region.


Board of Directors

Ebrahim Hussain EbrahimBoard Member

Hesham Al EmadiBoard Member

Khalid Mohamed Najibi Board Member

Mehran JamsheerBoard Member

Mustafa Mohamed ZartiVice Chairman

H.E. Ahmed Saif Al DarmakiBoard Member

Khalid KalbanBoard Member

Abdulla A. Kareem ShowaiterBoard Member

Adel Abdulaziz Al JabrBoard Member

Khadim Al QubaisiBoard Member

Sadoun Bin Bargash Al SadounBoard Member

H.E. Hamad Rashed Al NeaimiVice Chairman

Esam Yousif JanahiChairman


Esam Yousif Janahi - Chairman

One of the main founding members of First Energy Bank, Mr. Janahi holds numerous directorships including Chairman of Gulf Finance House, Bahrain Financial Harbour, Energy City Qatar, Royal Ranches Marrakech and Royal Resort Cap Malabata; Vice Chairman of Al Areen Holding; and is a Board Member of Gulf Holding Company. Mr. Janahi holds a Masters Degree in Business Administration from Hull University, United Kingdom and a Bachelors Degree in Industrial Management (Hons.) from University of Petroleum and Minerals, Kingdom of Saudi Arabia. With over 21 years of banking experience, including 8 years as CEO of GFH, Mr. Janahi is regarded as one of the most successful bankers in the Middle East.

H.E. Hamad Rashed Al Neaimi - Vice Chairman

His Excellency Hamad Rashed Al Neaimi with a broad work experience of over 20 years is the Chairman of Associated Group which possess around 50 companies under its umbrella. In addition to many key positions, his Excellency is a main shareholder in several companies such as Reem Investments and Al Mal Capital. He is also Chairman of Real Estate Investment and Services Co, Chairman and Shareholder of Electronic Stock and Brokerage Co. His Excellency is Managing Director of the Office of His Highness Sheikh Saeed Bin Zayed Al Nahyan, Managing Director of the office of His Highness Nahyan Bin Zayed Al Nahyan, and Corporate Managing Director of the Office of His Highness Sheikh Diab Bin Zayed Al Nahyan.

Mustafa Mohamed Zarti - Vice Chairman

Mr. Zarti is the Deputy CEO and member of the board of the Libyan Investment Authority (LIA) the Sovereign Wealth fund of Libya. He is also the Chairman and member of numerous oil & gas, investment and business institutions and has got over 15 years of work experience.

Abdulla A. Kareem Showaiter - Board Member

Mr. Showaiter is the Deputy Chief Executive Officer of Emirates Islamic Bank with a total of 31 years of work experience. He is a board member in numerous financial institutions and companies such as (Khaleeji Commercial Bank, Al Salam Bank, Mada’en Real Estate, Awqaf & Minor Affairs Foundation – Dubai Government.)

Khadim Al Qubaisi - Board Member

Around 16 years of working experience.

H.E. Ahmed Saif Al Darmaki - Board Member

H.E. Ahmed Saif Al Darmaki is the Managing Director of The Chairman’s Office and the Planning & Development Director of Abu Dhabi Water & Electricity Authority. Also, he has been working as the Chairman of Abu Dhabi Water and Electricity Company, the Deputy Chairman of the Board of Directors for Abu Dhabi National Energy Company (TAQA), as well as a Board Member in Abu Dhabi Future Energy Company (MASDAR). In addition, Mr. Al Darmaki is a Board Member in several Governmental, Semi-Governmental, and Private Firms and Organizations in the UAE and has got 14 years of work experience.

Khalid Kalban - Board Member

Mr. Kalban Managing Director and Chief Executive Officer of Dubai Investments, and member of the board of directors of Emirates National Bank of Dubai, Emirates International Brokerage LLC, Arab Insurance Group and Thuraya Satellite Communications-Telecommunications company.

Mr. Kalban also has wide experience and thorough knowledge in managing huge establishments, particularly those specializing in insurance services, financial services, chemicals and communications. His experience was gained during his career of 26 years.

Sadoun Bin Bargash Al Sadoun - Board Member

Worked in Several oil and gas companies such as: KNPC, Petromin and Saudi ARAMCO with a total experince of 19 years.

Joined MIDROC International Group (Owned by Sheikh Mohammed Al Amoudi) in 1989 and now President of ABV Rock Group KB. He is also the Chairman of two oil and gas companies in Saudi Arabia and member of the board of directors in five different companies within the MIDROC Group.

Adel Abdulaziz Al Jabr - Board Member

Mr. Adel Abdulaziz Al Jabr is A Board member of Al Jabr Trading Company “premier regional leading group of companies in fields of Auto Motors (NISSAN & KIA), Real Estate, Beverages, Home Appliances and Laundries”.

He is also the General Manager of Al Jabr General Contracting Company “A leading company in the field of Electro-Mechanical works in Saudi Arabia”, General Manager of Golden Chip Company “A newly established company that works in the field of smart and plastic cards industry at K.S.A”.

Mr. Adel Al Jabr represents Al Jabr Group of Companies with a total experience of 18 years.

Khalid Mohamed Najibi - Board Member

Mr. Najibi is Vice Chairman and Managing Director of Capital Management House B.S.C. and currently holds several key positions including Director and Chairman of Executive Committee of Bahrain Islamic Bank, Abaad Real Estate Company B.S.C, and is a founder member and Executive Director of Najibi Investment Company and Chairman of The Libya Fund. He is also a Board Member of Arbah Capital (Saudi Arabia) and QInvest LLC (Qatar). Mr. Najibi represents Capital Management House and Bahrain Islamic Bank’s stake in First Energy Bank. Mr. Najibi has got over 18 years of experince.

Ebrahim Hussain Ebrahim - Board Member

Mr. Ebrahim is the Chief Executive Officer and Board Member of Khaleeji Commercial Bank and was instrumental in setting up the bank since inception. Prior to joining Khaleeji Commercial Bank, has worked with a number of prominent financial institutions in Bahrain. Mr. Ebrahim has over 25 years of experience in both Islamic and conventional banking and is a holder of a Master of Business Administration with a concentration in Finance.

Mehran Jamsheer - Board Member

Mr. Jamsheer is the Deputy CEO of Gulf Finance House, managing all the Front Office functions, responsible for directing and management of deals and taking the lead in generating business development. With over 14 years experience as an Auditor, Mr. Jamsheer spent seven years at Arthur Andersen and also worked at BDO Jawad Habib.

Hesham Al Emadi - Board Member

Mr. Al Emadi is the Chief Executive Officer of Energy City Qatar, Libya and India; prior to which, he held a number of key positions in the energy and investment industry and established an Industrial Assessment Programme in all of the GCC in order to help improve and make a difference in the energy sector. Having been a Senior Researcher, Industrial Investment expert and having 16 years of experience in the field of Energy, Mr. Al Emadi has valuable know-how of the industry specially that of the GCC.


First Energy Bank is guided by a Sharia’a Supervisory Board consisting of two distinguished scholars who review the bank’s activities to ensure that all products and investment transactions comply fully with the rules and principles of Islamic Sharia’a

Shaikh Nidham Mohammed Saleh Yaquby Shaikh Nidham Mohammed Saleh Yaquby is a well-known Sharia’a Scholar and is recognized internationally. He is on the Sharia’a Supervisory Board of many Islamic financial institutions such as The Accounting and Auditing Organization for Islamic Financial Institutions, Khaleeji Commercial Bank, Shamil Bank, Bahrain Islamic Bank, and Executive member of Gulf Finance House, Abu Dhabi Islamic Bank, and a member of the Sharia’a Supervisory Boards of many other leading Islamic banks. He has contributed to the creation of many AAOIFI Sharia’a standards, participated in many Islamic finance and banking conferences around the world.

Shaikh Nidham is one of the pioneers in Islamic banking. He is a well-known Sharia’a scholar in all fields of Islamic Banking and Fiqh Al Mu’amalat.

Dr. Mohamad Akram LaldinDr. Mohamad Akram is currently the Executive Director of International Sharia’a Research Academy for Islamic Finance (ISRA). Prior to joining ISRA he was an Assistant Professor at the Kuliyah of Islamic Revealed Knowledge and Human Sciences, International Islamic University, Malaysia (IIUM). At present he is the Member of four HSBC Committees associated with Sharia’a, he’s a member of the Amanah Global Advisory Board, Member of Yassar Limited Sharia’a Advisory Board, Sharia’a Advisor to the Equity Trust Malaysian Berhad and Advisor to ZI Syariah Advisory Malaysia.

Dr. Akram holds a B.A Honours degree in Islamic jurisprudence and Legislation from the University of Jordan, Amman, Jordan and a PhD in Principles of Islamic Jurisprudence (Usul al-Faqh) from the University of Edinburgh, Scotland, United Kingdom. In addition he is also a prolific author of academic works specifically in the areas of Islamic Banking and Finance.

Sharia’a Supervisory Board


Executive Management

Vahan Zanoyan Acting Chief Executive Officer

In the past four years, Mr. Zanoyan has been serving as the Chairman and CEO of PFC Energy International, through which he brings critical expertise and experience in the global energy sector to FEB. Prior to this he spent ten years as President and CEO of PFC Energy, one of the most respected global advisory firms in the energy industry. Mr. Zanoyan has a long, and respected, history of over 35 years working in the energy industry and is well placed to lead the development of the Bank during its inaugural year.

Mr. Zanoyan will be responsible for overseeing the development of all aspects of the Bank’s business, including the overall investment strategy, building of a strong team and capabilities in the energy sector, representing the Bank in the global energy sector, and originating and screening of investment opportunities.

Educated at The American University in Beirut and at the University of Pennsylvania, Mr. Zanoyan has done pioneering work in applied analysis of the political economies of oil producing countries and their development process during the past two decades. He is a member of the Council on Foreign Relations, he has published many professional articles in specialized media on energy, and has given countless lectures and speeches at professional conferences on the same subject.


Mohammed H. Al-Nusuf

Deputy CEO – Chief Placement Officer

Under his current capacity, Mr. Al-Nusuf is responsible for all aspects of private placement transactions, from originating to structuring and execution. Mr. Al-Nusuf is responsible for placing private capital transactions to financial institutions, as well as the evaluation of client opportunities and generating origination ideas.

Mr. Al-Nusuf joined FEB in July 2008 coming from Gulf Finance House (GFH) where he held the position of Senior Executive Director (Regional Head) of Placement for the UAE, Oman and Yemen markets, and was responsible for the marketing and product placement to GFH’s diverse client base of high net worth individuals, family-owned conglomerates, financial institutions and sovereign wealth funds based throughout the gulf and MENA region.

Prior to joining GFH in 2004, Mr. Al-Nusuf held prominent positions for the past decade in a variety of financial firms based in Bahrain including ABC Islamic Bank and National Bank of Bahrain.

Mr. Al-Nusuf brings to FEB over 13 years of significant experience namely in the structuring of Islamic financial transactions and in the arrangement of syndications between some of the region’s largest and most reputable financial institutions.

Mr. Al-Nusuf holds a Bachelor of Science (Major in Finance) from the American University- Washington DC, USA.

Mohamed Shukri Ghanem

Deputy CEO - Chief Investment and Business Development Officer

Mr. Ghanem brings to FEB over 10 years of extensive experience in the regional financing market and in global energy issues. He has overall responsibility for the investment function at FEB, including the design and implementation of investment processes for all clients. Mr. Ghanem provides high level strategic investment advice including the investment processes and the additional asset classes and investment vehicles across the entire client base. He is also partly responsible for expanding the client base by ensuring the investment strategy is solid and sustainable.

Prior to joining FEB, Mr. Ghanem held the position of Lead Advisor at Arab Banking Corporation (BSC) (“ABC”) heading the North African business development team at the Global Project and Structured Finance division. He was responsible for the development and origination of advisory assignments throughout North Africa for the corporation, covering the oil, oil field, natural gas and power generation segments of the energy market.

Before joining ABC, Mr. Ghanem worked with the Organization of the Petrochemical Exporting Countries (OPEC) in Vienna where he worked on analyzing the global energy markets and the industry trends and wrote a number of research papers in his field.

Prior to OPEC, Mr. Ghanem worked with GED Handles G.m.b.H., Vienna in the risk and asset management in the energy and metals sectors. He worked in the trading department as a senior trader specializing in oil futures and options.

Mr. Ghanem holds a Bachelor of Arts (Major in Business) from Webster University (School of Business and Technology) in Vienna.


Esam Yousif Janahi - Chairman


Dear Shareholders,

In the name of Allah, the Beneficent, the Merciful, Prayers and Peace Be Upon the Last Apostle and Messenger, our Prophet Mohammed.

On behalf of the Board of Directors, it is my privilege to present the first annual report of First Energy Bank B.S.C. (c) (“FEB” hereinafter referred to as the “Bank”) for the period ending December 31st 2008.

As our inaugural year, 2008 saw the Bank mark several milestones on the path leading from its incorporation to being fully operational today. Firstly, and most notably, was the strong paid-in capital injected by its shareholders, which was capped at US$ 1 Billion, a significant increase to the initial private placement offering that was originally set at US$ 750 Million. I am pleased to report that the Bank’s current equity position remains intact, thus standing us in good stead to forge ahead with operations and planned investments in 2009.

FEB has a good pipeline of potential deals under consideration. Since last year was our inaugural year, we were not leveraged by external borrowings and as a result of the global financial climate, acquisition costs of some of our potential investments have come down. MENAdrill, our newly established offshore drilling company, is forging ahead with its plans and is expected to contribute to the Bank’s growth and profitability in the near future.

The period ending 31st December 2008 saw modest net profits for the Bank of around US$ 42,000, which for the first few months of operations is encouraging considering that they account for operating expenses, as well as the one-time pre-operating set up costs of the Bank. The operating profit in 2008 therefore (excluding pre-operating costs) was US$ 9.03 million.

FEB Milestones in 2008

The first Annual General Meeting of FEB was held on 19 June 2008 and its first Board of Directors meeting was held on 6 July 2008. At its first meeting, the Board of Directors elected me as Chairman of the Bank and I would like to take this opportunity to thank the Board members for their trust and confidence in me.

The Board meeting also saw the announcement of The Central Bank of Bahrain’s (CBB) award of a wholesale banking license (Islamic principles) to FEB, together with the appointment of KPMG as the Bank’s external auditors and the crucial appointments of two Sharia’a Scholars to the Sharia’a advisory board.

In July 2008, FEB launched its first project “MENADrill”, in collaboration with our valued partners GFH and Arab Drilling and Work Over Company (ADWOC), along with our strategic and technical advisors PFC Energy International and Noble Denton. MENAdrill is planned to be fully operational with its acquired assets and operational management by January 2011.

2009 Plans

Looking ahead, 2009 will be a unique year, in terms of the opportunities it presents for cautious investors who maintain a higher proportion of their portfolios in cash. While the Bank’s overall strategy and mandate have not changed, and while its central mission, “To Create and Capture Value in Global Energy” remains endorsed by its Board of Director, its business model and specific approach to opportunities in 2009 will reflect the unique circumstances of the current environment.

Chairman’s Letter to Shareholders


Two factors will drive our overall investment strategy and create a solid business approach for 2009 and the beginning of 2010. Firstly, the fact that we believe the cyclical nature of the energy business will exert its influence, and as very few of the fundamental capacity problems that haunted the industry before the economic recession have been addressed, we predict they will re-exert their bullish influence on the sector when economic recovery sets in. Also, in the absence of global recession, the energy sector fundamentals would support a range of US$ 65 to US$ 85 per barrel for crude oil, meaning that FEB and its current cash position, will be well placed to take advantage of a generally depressed sector.

FEB Operations and Transition Program

Our operations are currently being reviewed in order to streamline and increase efficiency. As such, the Bank’s arrangement for 2009 with GFH is now under review, to ultimately enable all services and processes provided by GFH to be transitioned to the Bank to enable operations on a stand-alone basis. The Bank has also engaged Ernst & Young and Catalyst Management Services to assist in the core banking systems selection and in reviewing our policies and procedures. Moreover, in conjunction with these experienced consultants, a full Transition Program has been developed to allow the Bank to operate fully and independently by July 2009.

As part of this transition, a Steering Committee composed of members of the senior management of the Bank has been established to manage this task and report to the relevant Board Committee. The intention is for the policies and procedure manuals already approved by both KPMG and the CBB to be enhanced and updated to better reflect the final operational model of the Bank. A core banking system will be selected and implemented within an agreed timeframe. CBB approvals will ultimately be sought marking the success of the process undertaken by the Bank.

Management Structure and Recruitment

The Bank’s senior management team is now in place, and other second level management positions are in either interview or recruitment status.

Yours truly,

Esam Yousif Janahi


Looking ahead, 2009 will be a unique year, in terms of the opportunities it presents for cautious investors who maintain a higher proportion of their portfolios in cash


Vahan Zanoyan - Acting CEO


The First Energy Bank (FEB) received its operating license in early June of 2008. In the first 6 months of its operations, the world economic and financial systems were subjected to the most erratic dislocations in almost eighty years. Equity markets crashed across the world, major financial institutions failed, liquidity dried up, economic growth came to a halt, unemployment rose rapidly, consumer and investor confidence was shattered almost everywhere, and oil prices crashed from over US$ 140 per barrel to under US$ 40 per barrel in just a matter of several months.

This was the environment in which our newly formed and licensed bank was welcomed into the world. These trends continued to worsen and, in spite of some isolated pockets of economic activity, still cast a long and dark shadow on economic prospects globally.

FEB used the first few months of its operating existence in 2008 to build capacity and to chart the course to fulfill our mission, namely, “To Create and Capture Value in Global Energy”. Furthermore, as highlighted in the Chairman’s letter to shareholders, the inevitable cyclical nature of the energy industry provides FEB with much richer and more diverse opportunities for investments than would a booming environment.

We at FEB believe that the scarcest commodity in the energy sector in these troubled times is neither natural resources nor capital. Rather, it is a solid understanding of the fundamentals of the energy industry, and an adequate measure of clarity of the key trends and realities to which the global energy sector will be subjected in the coming years. Driven by this belief, we have invested in our expertise in, and access to, energy projects throughout the world, and particularly in the Middle East and North Africa region, and will continue to do so.

We are confident that the new target rich environment facing FEB globally, combined with the strategic vision and guidance of our Board of Directors, will allow us to navigate through the complex yet highly rewarding energy sector. FEB looks forward to building a solid and diversified portfolio of energy projects during the course of 2009 and beyond, including utilities, oil and gas production, petrochemicals, energy infrastructure, renewable energy technologies, as well as oilfield services sector.

Vahan Zanoyan

Message from the Acting CEO


The Bank began its operations from 23 June 2008 with US$ 1 billion of equity capital.The financial performance depicted below is related to the period from 23 June 2008 to31 December 2008 in US$ Thousands. During 2008, the primary source of income was from placements with financial institutions.

Financial Highlights

OPERATINGEXPENSES 7,997PRE-OPERATINGEXPENSES 8,986

TOTAL EQUITY 1,000,042EARNINGS PER SHARE(BASICS) (US CENTS) 0.004

GROSS INCOME 17,025

NET INCOME 42TOTAL ASSETS 1,021,191

RETURN ON AVERAGE ASSETS 0.004%

COST TOINCOME RATIO 47.00%

RETURN ON AVERAGE EQUITY 0.004%NET INCOME MARGIN 0.25%


First Energy Bank’s (FEB) business model is built around 6 core business lines: Project Development, Private Equity, Islamic Finance, Asset Management, Mergers & Acquisitions and Treasury.

Project Development The Middle East and North Africa (MENA) region is the world’s major holder of various energy related resources. Developing and producing these resources and converting them to the products needed by the global economy require substantial investments in the energy sector and at different levels of the value chain.

FEB utilizes its strength to develop industrial projects drawing on all its available resources along with aligning itself with strategic partners that it has access to in the energy industry. FEB’s unique strength in this field comes from its strong and diversified shareholder base combined with the management team’s experience in the industry.

In order to capture and maximize value for FEB’s investors, the project development process starts from the early stage of conceptualizing the business idea and developing it to achieve a successful business.

Building on FEB’s financial strength, experience and solid balance sheet, the project development line enjoys the support of a range of other complementing products and services including financial advisory and Islamic finance which are essential elements to achieve a complete and well structured venture.

Private EquityFEB offers its clients direct investments in private equity opportunities that it identifies in the MENA region specifically as well as in the international arena. The Division’s investment strategy is based on two pillars. The first is to identify and invest in regional entities where FEB has a strong presence. FEB would add value through various activities venues including increased capitalization, financial restructuring, and effective market expansion utilizing the Bank’s extensive network and expertise in these fields. The second investment route is to identify opportunities in the international market. These opportunities are required to have distinct areas of strengths such as technology, technical expertise, know how, superior assets class, etc. FEB capitalizes on its effective network and marketing capabilities to maximize the value of the investment in the region through business expansion and setting up new joint ventures.

Mergers and AcquisitionsThe recent turmoil in global financial markets and short term corrections in energy prices, combined with expected recovery in demand growth, create attractive opportunities for mergers and acquisitions. The FEB M&A team has a proven track record in successfully executing major transactions across the MENA region. This expertise, backed by FEB’s considerable financial strength, will allow FEB to exploit market opportunities to earn superior returns for its clients.

Islamic FinancingIslamic finance has been one of the fastest growing finance segments in recent years. It has proven to be a resilient and valued sector especially in the Middle East. FEB’s Islamic finance team focuses on providing structure and financial advisory services that draw on many years of experience in this field and across the region. The team also focuses on providing “ring fenced” Sharia’a compliant project and structured finance to selected strategic transactions where risks are mitigated by these structures and returns are maximized.

Asset ManagementInvestors’ demand for Sharia’a compliant investment products has been increasing in recent years. FEB’s strategy is to provides innovative, diversified and well managed products that suit its clients’ needs and meets their return requirements. The FEB team is committed to continuously develop products, providing a well diversified selection of rewarding investments.

Treasury

The Islamic banking treasury sector has become increasingly competitive and sophisticated over the years, with demand being fueled by clients and investors expecting Islamic products to be available to provide the same features and benefits as the conventional investment and hedging products. As such, FEB has laid a solid foundation to cater for the fast growing demand of Islamic products offering a wide range of Sharia’a complaint products managed by a team of dedicated personnel.

Business Activities


MENAdrillLaunched in July 2008, MENAdrill is an offshore drilling and services company and one of FEB’s first initiatives.

Headquartered in Dubai, MENAdrill will focus on providing contract drilling services for offshore exploration and development in the Middle East, North Africa and Southeast Asia

MENAdrill aims to become one of the key drilling companies based in the region, allowing it to capitalize on the significant levels of drilling activity required to increase offshore oil and gas production throughout the region. MENAdrill’s initial assets include two Super M2 jack-up drills under construction with scheduled delivery in 2010.

MENAdrill was launched with strategic partners GFH and with strategic and technical advisors PFC Energy International and Noble Denton.


Developing the Future Professionals of the Industry

First Energy Bank (FEB) is based in the Kingdom of Bahrain, the heart of the global energy market. As such, it is uniquely placed to take advantage of the plethora of investment opportunities throughout the greater Middle East and North Africa (MENA) region. With a strong foundation in the Kingdom of Bahrain, it makes sense to ensure the longevity of its operations by continually developing the next generation of investment professionals.

To this end, the FEB Graduate Training Programme (GTP) was launched this year, with the Bank accepting six Graduate Trainees in this inaugural class. All the trainees hold at least a Bachelors Degree, and each has expressed an interest in different disciplines within FEB where they will begin their training. With varying skills sets and areas of expertise, the six successful candidates were selected from a pool of around 40 qualified graduates all of whom have an intense interest in being part of the rapidly growing and developing Islamic investment sector.

The Graduate Training Programme is a two year programme, during which time the trainees will have the opportunity to experience on a day to day basis the work undertaken by each section of the Bank, gaining practical and real experience. Based on this exposure, the candidates will make a decision on where they would ultimately like to continue working. This decision will be made in conjunction with each trainee’s assigned mentor who will be responsible for ensuring that they obtain the most from his or her experience as a member of the FEB team.

The core programme will include a series of developmental training workshops and seminars which will help to focus the trainee’s preferred direction and imbue them with the required knowledge and background to excel in their chosen career path. This is in addition to general training workshops on varying topics that will provide the graduates with essential skills in communication, management and networking.

The FEB Graduate Training Programme aims to help open doors for professionals interested in a career in the sector, and FEB is happy to provide the opportunity for the future leaders of the Islamic Investment Banking industry.

Impact on the Community


Corporate Governance


Governance is the combination of processes and structures implemented by the board in order to inform, direct, manage and monitor the activities of the organisation toward the achievement of its objectives. FEB’s Governance and Management structure is illustrated below:

FEB’s Governance structure comprises the Main Board of Directors (BOD) and the Board Sub committees. There are thirteen dependent non-executive Directors on the BOD. Their names are listed below:

Name Representing

Esam Yousif Janahi Self

H.E. Hamad Al Neaimi H.H. Sheikh Diab Bin Zayed Al Nahyan

Mustafa Zarti Libyan Investment Authority

Khadim Al Qubaisi Tasameem

H.E. Ahmed Al Darmaki Abu Dhabi Water and Electricity Authority

Abdulla Showaiter Emirates Islamic Bank

Sadoun Al Sadoun H.E. Sheikh Mohammed Al Amoudi

Mehran Jamsheer Gulf Finance House

Khalid Najibi Capital Management House

Adel Al Jabr Al Jabr Trading Co.

Khalid Bin Kalban Dubai Investments

Hesham Al Emadi Gulf Finance House

Ebrahim Hussain Khaleeji Commercial Bank

DCEO & Chief BD & Investment Officer DCEO & Chief Placement Officer Operations

Marketing

Board of Directors Audit Committee

Board Risk Committee

Board Investment Committee

Sharia’a Board

Risk

Treasury

Internal Audit

Nomination and Remuneration Committee

Legal andCompliance

Regional Head Bahrain & Qatar

Regional Head KSA

Regional Head Kuwait

Regional Head UAE, Oman & Yemen

Branding & Creative Strategy

Investor Relations & Events

PR/Media Relations

Corporate Communications

Regional Head Other ME & N Africa

Regional Head SE Asia

Regional Head ROW

Regional Head Iran

Regional Placement Teams Investment Banking Islamic Finance

Pre-screening & Pre-Feasibility

Islamic DCM/IPO

Islamic Finance Advisory

IPT Administration

IPT Advisory

CEO

Venture Capital, Private Equity &Direct Investments

Project Development

M & A and CorporateFinance Advisory

Regional Investment GCC, N Africa,SE Asia, ROW

Corporate Governance


There are four Board Sub-committees, namely: the Board Audit Committee, the Board Risk Committee, the Board Investment Committee, and the Board Remunerations and Nominations Committee. Their functions and membership are described as follows:

Board Audit Committee The Board Audit Committee has a major responsibility towards ensuring that the financial statements provide a true and fair picture of the financial condition of the Bank. In this regard, the Board Audit Committee ensures that the financial statements of the bank are in accordance to the accounting standards, that accounting principles are appropriately applied, accounting records are properly maintained and reasonable assumptions have been made in the preparation of the financial statements. Further, the Board Audit Committee also ensures that the activities in the Bank are conducted in line with the laid out policies and procedures. Finally, the Board Audit Committee establishes the control framework to monitor the abovementioned aspects and report any non-compliance.

The following persons are members of the Board Audit Committee:

Audit Committee

Name RepresentingEbrahim Hussain Khaleeji Commercial Bank


Hesham Al Emadi Gulf Finance House

Adel Al Jabr Al Jabr Trading Co.

Board Risk Committee

The Board-level Risk Committee is responsible for oversight of the risks assumed by and the functioning and adequacy of the risk management framework of the Bank by the Board. Risk Management operates an independent control function within the Bank.

The Board Risk Committee reviews the effectiveness and adequacy of the Risk Management framework of the Bank including the limit structure for various risks. Through the Risk Management function, it also ensures the adherence of the business units to the risk management policies and procedures of the Bank on an ongoing basis. The Committee shall, after due evaluation, provide its recommendations on enhancing the risk management framework of the Bank to the Board.

The following persons are members of the Board Risk Committee:

Risk Committee

Name RepresentingKhalid Najibi Capital Management House

Ebrahim Hussain Khaleeji Commercial Bank

Hesham Al Emadi Gulf Finance House Board Nomination and Remuneration Committee The Nomination and Remuneration Committee of the Board is about the continuation of the existing Directors and appointment of new Directors. Remuneration is about the compensation / rewards to the Executive Directors and/or Senior Management and other employees of the Bank.

The Committee is responsible to ensure sufficient depth and divergence in the Board and Board-level committees to enable provision of guidance and oversight to the Bank. The Committee also oversees the process of selection and appointment of the Senior Management and the remuneration and incentives to the Executive Directors and the employees of the Bank.

The following persons are members of the Board Nomination Committee:

Nomination Committee

Name Representing





Adel Al Jabr Al Jabr Trading Co. Board Investment Committee The Board Investment Committee provides scrutiny and evaluation in investment proposals. This enhances the risk taking framework of the Bank with multiple levels of checks. The Committee decides on the investment proposals involving exposure within its delegated powers after detailed evaluation and considering the risk framework and recommendation of the Management. For proposals involving higher exposures, the same shall be recommended to the Board for decision.

The following persons are members of the Board Investment Committee:

Investment Committee

Name Representing



Mustafa Zarti Libyan Investment Authority

Khadim Al Qubaisi Tasameem

H.E. Ahmed Al Darmaki Abu Dhabi Water and Electricity Authority


Sadoun Al Sadoun H.E. Sheikh Mohammed Al Amoudi

Mehran Jamsheer Gulf Finance House

Other disclosuresCommunication with stakeholders

The Bank communicates with its customers and stakeholders through various channels. Information on developments, financial results, new products or any updates of existing products are placed on the Bank’s website www.1stenergybank.com and/or published in the media. Product details are also disseminated to customers and other interested parties through prospectus, brochures, and/or periodic investment updates.

Executive compensation

The Bank is currently developing both a short-term and long-term compensation structure for its executive management based on current market surveys and industry norms. The Board of Directors is entitled to sitting fees and their annual remuneration is subject to the approval of the shareholders at the end of each financial year.


Financial Statements


Sharia’a Supervisory Board Report

Prayer and Peace upon the Last Apostle and Messenger, Our Prophet Mohammed, his relatives and comrades.

The Chairman of the Sharia’a Supervisory Board has been presented with the Bank’s investment activities and financial statements audited for the period 23rd June 2008 to 31st December 2008.

In accordance to Sharia’a compliant regulations it is the duty of the Sharia’a Supervisory Board to express an independent opinion on the basis of the Bank’s operations and accordingly prepare this report. It is the responsibility of the Bank’s management to ensure the implementation of the Board’s opinions and decisions.

Upon the Board’s review, the Chairman has found that the Bank’s investment activities for this period are in compliance with the glorious Islamic Sharia’a and has approved the issuance of this report.

The Chairman expresses his thanks to the Bank’s management for their understanding and cooperation in the application of the provisions of Islamic law. The Chairman prays for the Bank to grow and prosper in the light of Islamic law.

Praise be to Allah, Lord of the Worlds.

Prayers on Prophet Mohammed (Peace Be Upon Him), all his family and companions.

Sheikh Nizam Mohammed Yaquby

Chairman


FIRST ENERGY BANK B.S.C. (c)

Manama, Kingdom of Bahrain 27 February 2009

Report on the financial statements

We have audited the accompanying financial statements of First Energy Bank B.S.C. (c) (the ‘Bank‘), which comprise the balance sheet as at 31 December 2008, and the statements of income, changes in equity and cash flows for the period from 23 June 2008 to 31 December 2008, and a summary of significant accounting policies and other explanatory notes.

Responsibility of the Board of Directors for the financial statements

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

Auditors’ responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with both the Auditing Standards for Islamic Financial Institutions and International Standards on Auditing. Those standards require that we comply with relevant ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free of material misstatement.

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

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

Opinion

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Bank as at 31 December 2008, and its financial performance, cash flows and changes in equity for the period from 23 June 2008 to 31 December 2008 in accordance with Financial Accounting Standards issued by the Accounting and Auditing Organisation for Islamic Financial Institutions and the Sharia’a rules and principles as determined by the Sharia’a Supervisory Board of the Bank.

In addition, in our opinion, the financial statements present fairly, in all material respects, the financial position of the Bank as at 31 December 2008 and its financial performance and its cash flows for the period from 23 June 2008 to 31 December 2008 in accordance with International Financial Reporting Standards.

Report on other legal and regulatory requirements

In addition, in our opinion, the Bank has maintained proper accounting records and the financial statements are in agreement therewith. We have reviewed the accompanying chairman’s report and confirm that the information contained therein is consistent with the financial statements. We are not aware of any violations of the Bahrain Commercial Companies Law 2001, the Central Bank of Bahrain and Financial Institutions Law 2006, the terms of the Bank’s license or its memorandum and articles of association having occurred during the six months ended 31 December 2008 that might have had a material effect on the business of the Bank or on its financial position. Satisfactory explanations and information have been provided to us by the management in response to all our requests.

KPMG

INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERS


Note 31 December 2008

ASSETS

Cash and bank balances 4 2,225

Placements with financial institutions 5 970,665

Other assets 6 45,285

Equipment and capital work-in-progress 7 3,016

Total assets 1,021,191

LIABILITIES AND EQUITY

Liabilities

Payable to a related party 13 18,294

Accruals and other liabilities 8 2,855

Total liabilities 21,149

Equity

Share capital 9 1,000,000

Statutory reserve 4

Retained earnings 38

Total equity (page 32) 1,000,042

Total liabilities and equity 1,021,191

The financial statements, which consist of pages 30 to 44, were approved by the Board of Directors on 27 February 2009 and signed on its behalf by:

Esam Yousif Janahi Khalid Mohamed Najibi Vahan ZanoyanChairman Director Acting Chief Executive Officer

BALANCE SHEETas at 31 December 2008 US$ 000’s

The accompanying notes 1 to 26 form an integral part of these financial statements


Note

from23 June 2008

to 31 December 2008

Income from placements with financial institutions 17,025

Total income 17,025

Staff cost 10 2,056

Other operating expenses 11 5,941

Pre-operating expenses 12 8,986

Total expenses 16,983

PROFIT FOR THE PERIOD 42

Earnings per share (US cents)

Basic 19 0.004

INCOME STATEMENTFor the period from 23 June 2008 to 31 December 2008 US$ 000’s



2008Share

capital

Share

premium

Statutory

reserve

Retained

earningsTotal

Profit for the period - - - 42 42

Total recognised income and expense - - - 42 42

Share capital introduced (note 9) 1,000,000 9,100 - - 1,009,100

Share issue expenses (note 12) - (9,100) - - (9,100)

Transfer to statutory reserve - - 4 (4) -

Balance at 31 December 2008 1,000,000 - 4 38 1,000,042

STATEMENT OF CHANGES IN EQUITYFor the period from 23 June 2008 to 31 December 2008 US$ 000’s



from23 June 2008

to 31 December 2008

OPERATING ACTIVITIES

Income from placements with financial institutions received 13,550

Payment for expenses and project costs (43,090)

Cash flows from operating activities (29,540)

INVESTING ACTIVITIES

Advance paid for acquisition of an investment (3,646)

Payment for purchase of equipment and capital work-in-progress (3,024)

Cash flows from investing activities (6,670)

FINANCING ACTIVITIES

Proceeds from issue of ordinary shares 1,009,100

Cash flows from financing activities 1,009,100

Net increase in cash and cash equivalents 972,890

Cash and cash equivalents at the beginning of the period -

Cash and cash equivalents at 31 December 2008 972,890

Cash and cash equivalents comprise:

Cash and bank balances 2,225

Placements with financial institutions 970,665

972,890

STATEMENT OF CASH FLOWSFor the period from 23 June 2008 to 31 December 2008 US$ 000’s



NOTES TO THE FINANCIAL STATEMENTSFor the period from 23 June 2008 to 31 December 2008 US$ 000’s

1 INCORPORATION AND PRINCIPAL ACTIVITY

First Energy Bank BSC (c) (the ‘Bank‘) was incorporated on 23 June 2008 in the Kingdom of Bahrain under Commercial Registration No. 69089. The Bank operates as an Islamic Wholesale Bank under a license granted by the Central Bank of Bahrain (‘CBB’).

The Bank’s activities are regulated by the CBB and supervised by a Sharia’a Supervisory Board whose role is defined in the Bank’s Memorandum and Articles of Association.

The principal activities of the Bank include investment banking services which comply with Islamic rules and principles according to the opinion of the Bank’s Sharia’a Supervisory Board.

2 SIGNIFICANT ACCOUNTING POLICIES

The significant accounting polices applied in the preparation of these financial statements are set out below.

This being the first financial reporting period of the Bank, no comparative information has been presented.

(a) Statement of complianceThe financial statements have been prepared in accordance with both the Financial Accounting Standards (‘FAS’) issued by the Accounting and Auditing Organisation for Islamic Financial Institutions and International Financial Reporting Standards (‘IFRS’).

(b) Basis of preparation The financial statements are presented in US Dollars, being the principal currency of the Bank’s operations and are prepared on the

historical cost basis.

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Bank’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in note 3.

(c) Foreign currency transactions (i) Functional and presentation currency

Items included in the financial statements are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The financial statements are presented in US dollars, which is the Bank’s functional and presentation currency.

(ii) Transactions and balancesForeign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement. Translation differences on non-monetary items are included as a component of equity.

(d) Financial assets and liabilities (i) Recognition and de-recognition

The Bank initially recognises placements, receivables, investors’ funds and payables on the date at which they are originated. All other financial assets and liabilities are recognised at the trade date i.e. the date that the Bank contracts to purchase or sell the asset, at which the Bank becomes party to the contractual provisions of the instrument.

A financial asset or liability is initially measured at fair value which is the value of the consideration given (in the case of an asset) or received (in the case of a liability), including transaction costs that are directly attributable to its acquisition or issue.

The Bank derecognises a financial asset when the rights to receive cash flows from the financial assets have expired or where the Bank has transferred substantially all risk and rewards of ownership. The Bank writes off certain financial assets when they are determined uncollectible. The Bank derecognises a financial liability when its contractual obligations are discharged, cancelled or expire.




2 SIGNIFICANT ACCOUNTING POLICIES (continued)

(ii) Measurement principlesFinancial assets and liabilities are measured either at fair value, amortised cost or in certain cases carried at cost.

Fair value measurement

Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction on the measurement date.

When available, the Bank measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if quoted prices are readily and regularly available and represent actual and regularly occurring market transactions on an arm’s length basis. If a market for a financial instrument is not active, the Bank uses valuation techniques to establish a reliable measure of fair value.

Amortised cost measurementThe amortised cost of a financial asset or liability is the amount at which the financial asset or liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortisation using the effective profit method of any difference between the initial amount recognised and the maturity amount, minus any reduction for impairment. The calculation of the effective profit rate includes all fees and points paid or received that are an integral part of the effective profit rate.

Measurement at costWhen a financial asset or liability does not have fixed or determinable payments and a reliable measure of fair value cannot be determined, it is carried at cost.

(e) Placements with financial institutionsThese comprise placements made in the form of wakala contracts or international commodity murabaha contracts. Placements are usually short term in nature and are stated at their amortised cost.

(f) Cash and cash equivalents For the purpose of statement of cash flows, cash and cash equivalents comprise cash and balances with banks and short-term highly liquid assets (placements) with maturities of three months or less when acquired which are subject to insignificant risk of changes in fair value and are used by the Bank in the management of its short-term commitments and liquidity.

(g) EquipmentEquipment is stated at cost, net of accumulated depreciation. Depreciation is computed using the straight-line method to write off the cost of the assets over their estimated useful lives ranging from three to five years. The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.

(h) Impairment of assetsThe Bank assesses at each balance sheet date whether there is objective evidence that an asset is impaired.

Financial assetsObjective evidence that financial assets are impaired can include default or delinquency by a borrower, restructuring of a financing or advance by the Bank on terms that the Bank would not otherwise consider, indications that a borrower or issuer will enter bankruptcy, the disappearance of an active market for a security, or other observable data relating to a group of assets such as adverse changes in the payment status of borrowers or issuers in the group, or economic conditions that correlate with defaults in the group. Impairment losses are recognised in the income statement and reflected in an allowance account.

Other non-financial assetsThe carrying amount of the Bank’s assets, other than financial assets, is reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated. The recoverable amount of an asset is the greater of its value in use or fair value less costs to sell. An impairment loss is recognised whenever the carrying amount of an asset exceeds its estimated recoverable amount. Impairment losses are recognised in the income statement. Impairment losses are reversed only if there is an indication that the impairment loss may no longer exist and there has been a change in the estimates used to determine the recoverable amount.




2 SIGNIFICANT ACCOUNTING POLICIES (continued)

(i) Dividends and board remunerationDividends to shareholders and board remuneration are recognised as liabilities in the period in which they are declared.

(j) Project costs recoverableIncremental costs that are directly attributable to securing an investment contract are recognised as an asset if they can be identified separately, measured reliably and if it is probable that they will be recovered.

(k) Statutory reserve The Bahrain Commercial Companies Law 2001 requires that 10 per cent of the annual net profit be appropriated to a statutory reserve which is normally distributable only on dissolution. Appropriations may cease when the reserve reaches 50 per cent of the paid up share capital.

(l) Income from placements with financial institutions is recognised on a time-apportioned basis over the period of the related contract using the effective profit method.

(m) Earnings prohibited by Sharia’aThe Bank is committed to avoid recognising any income generated from non-Islamic sources. Accordingly, non-Islamic income (if any) will be credited to a charity account which is utilised for charitable purposes.

(n) ZakahThe Bank is not required to pay Zakah on behalf of its shareholders on its undistributed profits. However, the Bank is required to calculate and notify, under a separate report, individual shareholders of their pro-rata share of the Zakah payable by them on distributed profits. These calculations are approved by the Bank’s Shari’a Supervisory Board.

(o) Employee benefits

(i) Short-term benefitsShort-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A provision is recognised for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Bank has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.

(ii) Post employment benefits Pensions and other social benefits for Bahraini employees are covered by the General Organisation for Social Insurance scheme, which is a ‘defined contribution scheme’ in nature under IAS 19 ‘Employee Benefits’, and to which employees and employers contribute monthly on a fixed-percentage-of-salaries basis. Contributions by the Bank are recognised as an expense in income statement when they are due.

Expatriate employees on fixed contracts are entitled to leaving indemnities payable under the Bahraini Labour Law for the Private Sector of 1976, based on length of service and final remuneration. Provision for this unfunded commitment, which is a ‘defined benefit scheme’ in nature under IAS 19, has been made by calculating the notional liability had all employees left at the balance sheet date. These benefits are in the nature of a ‘defined benefit scheme’ and any increase or decrease in the benefit obligation is recognised in the income statement.

(p) ProvisionsA provision is recognised if, as a result of a past event, the Bank has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation.

(q) Segment reportingA segment is a distinguishable component of the Bank that is engaged either in providing products or services (business segment) or in providing products or services within a particular environment (geographical segment), which is subject to risks and rewards that are different from those of other segment. The Bank currently only operates in one primary segment of investment banking.



3 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES

The Bank makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectation of future events that are believed to be reasonable under the circumstances.

(i) Impairment of receivablesEach counterparty exposure is evaluated individually for impairment and is based upon management’s best estimate of the present value of the cash flows that are expected to be received. In estimating these cash flows, management makes judgements about a counterparty’s financial situation, level of subordination available to the Bank and the net realisable value of any underlying assets. Each asset is assessed on its merits, and the workout strategy and estimate of cash flows considered recoverable and approved by the Board of Directors.

(ii) Special purpose entitiesThe Bank sponsors the formation of special purpose entities (SPE’s) primarily for the purpose of allowing clients to hold investments. The Bank does not consolidate SPE’s that it does not have the power to control. In determining whether the Bank has the power to control an SPE, judgements are made about the objectives of the SPE’s activities, its exposure to the risks and rewards, as well as about the Bank’s intention and ability to make operational decisions for the SPE and whether the Bank derives benefits from such decisions.

4 CASH AND BANK BALANCES

31 December 2008

Cash 3

Bank balances 2,222

2,225

5 PLACEMENTS WITH FINANCIAL INSTITUTIONS

31 December 2008

Wakala contracts 830,486

Gross commodity murabaha contracts 140,357

Less: Deferred profits (178)

970,665

6 OTHER ASSETS

31 December 2008

Project costs recoverable 37,452Advance paid for acquisition of an investment 3,646Murabaha profits receivable 3,475Others 712

45,285




7 EQUIPMENT AND CAPITAL WORK-IN-PROGRESS

Equipment Computers Total

CostAdditions during the period 16 253 269

At 31 December 16 253 269

DepreciationCharge for the period 1 8 9

At 31 December 1 8 9Net book value 15 245 260Capital work-in-progress - - 2,756Total 15 245 3,016

8 ACCRUALS AND OTHER LIABILITIES

31 December 2008

Employee-related accruals 190Accounts payables 69Accrued expenses 1,296Advance from investors 1,300

2,855

9 SHARE CAPITAL

31 December 2008

Authorised:2,000,000,000 ordinary shares of US$ 1 each 2,000,000

Issued, subscribed and paid-up:1,000,000,000 ordinary shares of US$ 1 each 1,000,000

As per the terms of the subscription for shares in the Bank, the shareholders paid certain fees to the promoters in addition to the subscription amounts. On closure of the subscription, the promoters transferred to the Bank US$ 9.1 million of fees collected to cover part of the share issue expenses and has been recognised as share premium.

Details of the shareholders and the number of shares held are as follows:

No of shares % of holding

Financial institutions 195,000,000 19.50%Corporate and other entities 554,000,000 55.40%Individuals 251,000,000 25.10%




10 STAFF COST

31 December 2008

Salaries and benefits 1,911

Social insurance expenses 65

Other staff expenses 80

2,056

11 OTHER OPERATING EXPENSES

31 December 2008

Rent and utilities 262

Travelling and related expenses 965

Professional and consultancy fee 2,656

Advertising and marketing expenses 1,386

Other expenses 672

5,941

12 PRE-OPERATING EXPENSES

31 December 2008

Professional, legal and consultancy charges 18,086

Less: Adjusted against share premium (9,100)

8,986

Pre-operating expenses primarily relate to expenses incurred by the founders in relation to the share issue and formation of the Bank and certain expenses incurred prior to incorporation of the Bank. Share issue expenses have been adjusted against share premium to the extent of the available balance and the remaining amounts has been charged to the income statement as pre-operating expenses. The pre-operating expenses were reimbursed to the founders based on the approval of the shareholders and the Board of Directors.

13 RELATED PARTY TRANSACTIONS

Parties are considered to be related if one party has the ability to control the other party or exercise significant influence or joint control over the other party in making financial and operating decisions. Related parties include major shareholders, Board of Directors and Executive Management of the Bank and entities over which they exercises control and/ or significant influence.

The related party transactions and balances included in these financial statements are as follows:




13 RELATED PARTY TRANSACTIONS (continued)31 December

2008

Assets

Placements with financial institutions 750,256

Murabaha profits receivable 3,475

Liabilities

Payable to a related party 18,294

31 December 2008

Income and expenditure (transactions)

Income from placements with financial institutions 16,226

Reimbursement of pre-operating expenses 17,250

Details of Directors’ interests in the Bank’s ordinary shares as at the end of the period were:

Categories*Number of

sharesNumber of

Directors

10% and above 100,000,000 1

* Expressed as a percentage of total outstanding shares of the Bank.

Key management personnel of the Bank comprise of the Board of Directors and key members of management having authority and responsibility for planning, directing and controlling the activities of the Bank. The key management personnel compensation is as follows:

31 December 2008

Board member fees 145

Salary and other short-term benefits 318

Post employment benefits 10

14 ZAKAH

The Bank does not collect or pay Zakah on behalf of its shareholders or investors. Zakah payable by the shareholders is computed by the Bank on the basis of the method prescribed by the Bank’s Sharia’a Supervisory Board and notified to shareholders annually. During the period no Zakah is payable by the shareholders as the Bank was in operation for a period of six months only.

15 EARNINGS PROHIBITED BY SHARIA’A

During the period, there were no earnings from non-islamic transactions that are prohibited by Sharia’a.

16 SHARIA’A SUPERVISORY BOARD

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




17 SOCIAL RESPONSIBILITY

The Bank intends to discharge its social responsibilities through donations to charitable causes and organisations.

18 PROPOSED APPROPRIATIONS

No appropriations are currently being proposed by the Board of Directors. Appropriations, if any, shall be considered for approval of the shareholders at the annual general meeting.

19 EARNINGS PER SHARE

Basic earnings per share is calculated by dividing the profit for the period by the weighted average number of equity shares outstanding during the period ended 31 December 2008 as follows:

Profit for the period (US$ 000’s) 42

Weighted average number of equity shares (000’s) 1,000,000

Basic earnings per share (in US cents) 0.004

The Bank has not issued any potentially dilutive instruments.

20 MATURITY PROFILE

The maturity profile of financial assets and financial liabilities based on the remaining periods to contractual maturity dates was as follows:-

Gross undiscounted cash flows

2008 Up to 3 months

3 to 6 months

6 months to 1 year

1 to 3 years

Over 3 years Total Carrying

amount

Assets

Bank balances 2,222 - - - - 2,222 2,222

Placements with financial institutions 971,779 - - - - 971,779 970,665

Other assets 3,873 3,960 37,452 - - 45,285 45,285

Total financial assets 977,874 3,960 37,452 - - 1,019,286 1,018,172

Liabilities

Payable to a related party 18,294 - - - - 18,294 18,294

Accruals and other liabilities 2,805 - - - - 2,805 2,805

Total financial liabilities 21,099 - - - - 21,099 21,099

Certain balances in the above table will not agree directly to the balances in the balance sheet as the table incorporates all cash flows on an undiscounted basis. The expected maturities of the financial assets and liabilities are not significant different from their contractual maturities.




21 CONCENTRATION OF ASSETS AND LIABILITIES

a) Industry sector

2008Banks and

financial institutions

Others Total

AssetsBank balances 2,222 - 2,222Placements with financial institutions 970,665 - 970,665Other assets 3,475 44,826 48,301

Total assets 976,362 44,826 1,021,188

LiabilitiesPayable to a related party 18,294 - 18,294Accruals and other liabilities - 2,855 2,855

Total liabilities 18,294 2,855 21,149

b) Geographic region The geographic concentration of the Bank’s assets and liabilities as at 31 December 2008 is limited to GCC countries.

22 COMMITMENTS AND CONTINGENCIES

The capital commitments contracted by the Bank as at 31 December 2008 in relation to project costs amounted to US$ 330.28 million. In its normal course of business, the Bank initially undertakes the contractual commitments in relation to project assets and then places the project with its investors along with the associated contractual commitments.

23 FINANCIAL INSTRUMENTS

a) FAIR VALUE OF FINANCIAL INSTRUMENTSFair value is an amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. The estimated fair values of the Bank’s financial instruments are not significantly different from their book values.

b) CLASSIFICATION OF FINANCIAL INSTRUMENTSAll the financial assets of the Bank are classified as ‘loans and receivables’ and all the financial liabilities are classified as ‘others at amortised cost’.

24 FINANCIAL RISK MANAGEMENT

The Bank has exposure to the following risks from its use of financial instruments:

• credit risk;• liquidity risk;• market risks; and• operational risk

The Bank has a risk management framework in place for managing these risks which is constantly evolving as the business activities change in response to credit, market, product and other developments.

This note presents information about the Bank’s exposure to each of the above risks, its objectives, policies and processes for measuring and managing risk, and the Bank’s management of capital.

Risk management frameworkThe Board of Directors has overall responsibility for the establishment and oversight of the Bank’s risk management framework.The Bank’s risk management policies are established to identify and analyse the risks faced by the Bank, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed to reflect changes in market conditions, products and services offered.




24 FINANCIAL RISK MANAGEMENT (continued)

The Board of Directors is responsible for monitoring compliance with the Bank’s risk management policies and procedures, and for reviewing the adequacy of the risk management framework in relation to the risks faced by the Bank.The principal risks associated with the Bank’s business and the related risk management processes are as follows:

Credit risk Credit risk is the risk of financial loss to the Bank if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the placements with financial institutions and certain receivables.

For risk management reporting purposes, the Bank considers and consolidates all elements of credit risk exposure (such as individual obligor default risk, country and sector risk).

Management of credit riskRisk is assessed on an individual basis for each receivable and has been reviewed by the Board of Directors as at 31 December 2008. The Bank does not perform a collective assessment of impairment for its credit exposures as the credit characteristics of each exposure is considered to be different. Credit exposures are subject to regular reviews by the Board of Directors.

Maximum credit exposureThe maximum credit risk exposure has been disclosed below:

2008 Bank balancesPlacements

with financial institutions

Other assets

Total carrying amount 2,222 970,665 45,285

The Bank’s credit risk on bank balances and placements with financial institutions is limited as these are placed with investment-grade banks. The other credit exposures have been evaluated on a case-by-case basis and the Board of Directors has assessed that the exposures are currently performing and not impaired. The credit exposures of the Bank are not collateralised and there were no significant past due exposures as at 31 December 2008.

Market RiskMarket risk is the risk that changes in market prices, such as profit rates, equity prices, foreign exchange rates and credit spreads (not relating to changes in the obligor’s / issuer’s credit standing) will affect the Bank’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return on risk. The Bank does not have a trading portfolio and has no investment in equity instruments and hence is not exposed to market risk and other equity price risks in relation to such instruments. The different types of risks with exposures, objectives, policies and processes to manage the risk have been detailed hereunder.

Profit rate riskProfit rate risk arises due to differences in timing of re-pricing of the Bank’s assets and liabilities. The Bank’s profit rate sensitive assets are mainly placements with financial institutions. Profit rate risk is managed principally through monitoring profit rate gaps and by having pre-approved limits for repricing bands. The effective profit rate on placements with financial institutions during the period was 2.39%.

The Bank’s exposure to profit rate risk is currently considered to be limited due to the short-term nature of the funds invested in placements with financial institutions.

Currency riskCurrency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Bank’s major exposure is in GCC currencies, which are primarily pegged to the US Dollars. The Bank does not have significant net exposures denominated in other foreign currencies as at 31 December 2008.

Liquidity riskLiquidity risk is the risk that the Bank will encounter difficulty in meeting obligations from its financial liabilities. The Bank’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Bank’s reputation.




24 FINANCIAL RISK MANAGEMENT (continued)

The Board of Directors approves significant policies and strategies related to the management of liquidity. The Management reviews the liquidity profile of the Bank on a regular basis and any material change in the Bank’s current or prospective liquidity position is notified to the Board. The maturity profile of assets and liabilities has been provided in note 20.

Operational riskOperational risk is the risk of loss arising from systems and control failures, fraud and human error, which can result in financial and reputation loss, and legal and regulatory consequences. The Bank manages operational risk through appropriate controls, instituting segregation of duties and internal checks and balances. In addition the Bank is committed to the training of its staff. The Bank is in the process of conducting Risk Control Self Assessment of Operational risk in all departments of the Bank to identify the important Key Risk Areas and Key Risk Triggers. This process is expected to be completed by 2009.

25 CAPITAL MANAGEMENT

The Bank’s regulator Central Bank of Bahrain (CBB) sets and monitors capital requirements for the Bank as a whole. In implementing current capital requirements CBB requires the Bank to maintain a prescribed ratio of total capital to total risk-weighted assets. Banking operations are categorised as either trading book or banking book, and risk-weighted assets are determined according to specified requirements that seek to reflect the varying levels of risk attached to assets and off-balance sheet exposures.

The Bank’s policy is to maintain strong capital base so as to maintain investor, creditor and market confidence and to sustain the future development of the business. Capital requirements of CBB have been complied through out the period.

The Bank is required to comply with the provisions of the revised Capital Adequacy Module of the CBB (based on the Basel II and IFSB framework) in respect of regulatory capital. The Bank has adopted the standardised approach for credit and market risk credit and basic indicator approach for operational risk management under the revised framework.

The Bank’s regulatory capital position at 31 December 2008 was as follows:

Capital adequacy 2008

Total risk weighted exposure 1,116,488

Tier 1 capital 1,000,042Tier 2 capital -

Total regulatory capital 1,000,042

Total regulatory capital expressed as a percentage of total risk weighted assets 89.57%

26 NEW INTERNATIONAL FINANCIAL REPORTING STANDARDS AND INTERPRETATIONS NOT YET ADOPTED

During the year, the following new/ amended IFRS’s standards and interpretations relevant to the activities of the Bank have been issued which are not yet mandatory for adoption by the Bank:

• IAS 1 Presentation of Financial Statements (effective for annual period beginning on or after 1 January 2009);• IAS 23 - Borrowing Costs (effective for annual period beginning on or after 1 January 2009); and• IAS 32 Financial Instruments: Presentation and IAS 1 Presentation of Financial Statements: Puttable Financial Instruments and

Obligations Arising on Liquidation (effective for annual period beginning on or after 1 January 2009).

The adoption of these standards and interpretations and certain other amendments to existing standards with varied effective dates made by International Accounting Standards Board as part of its first annual improvements project are not expected to have any material impact on the financial statements.




The inevitable cyclical nature of the energy industry provides First Energy Bank with much richer and more diverse opportunities for investments than would a booming environment


Risk and Capital Management


Contents

1 Executive Summary 49

2 Introduction 49

2.1 Pilar I 49

2.2 Pilar II 50

2.3 Pilar III 50

3 Overall Risk and Capital Management 50

3.1 Risk Management Strategy 50

3.2 Risk Management Framework 51

3.3 Capital Management 51

3.4 Risk Types 51

4 Capital Structure and Capital Adequacy Ratio 51

4.1 Capital and Group Structure 51

4.2 Capital Adequacy 52

5 Credit Risk 52

5.1 Credit Risk Management 52

5.2 Capital Requirements for Credit Risk 53

5.3 Quantitative Information on Credit Risk 53

5.4 Large Exposures 53

6 Market Risk 53

7 Operational Risk 54

7.1 Operational Risk Management 54

7.2 Legal Compliance and Litigation 54

7.3 Sharia’a Compliance 54

7.4 Capital Requirements for Operational Risk 54

8 Liquidity Risk 55

9 Profit Rate Risk in the Banking Book 55

10 Reputational Risk (non-performance risk) 55

11 Strategic Risk 56

12 Other Risks 56

Basel II - Pillar III Disclosures


1 Executive summary

First Energy Bank B.S.C. (c) (‘FEB’/ ‘the Bank‘) was incorporated on 23 June 2008 in the Kingdom of Bahrain under Commercial Registration No. 69089. The Bank operates as an Islamic Wholesale Bank under a license granted by the Central Bank of Bahrain (‘CBB’). The principal activities of the Bank include investment banking services which comply with Islamic rules and principles as determined by the Sharia’a Supervisory Board of the Bank.

The CBB Basel II guidelines became effective on 1 January 2008 as the common framework for the implementation of Basel II capital adequacy framework for Banks incorporated in the Kingdom of Bahrain. The disclosures in this report have been prepared in accordance with the CBB requirements outlined in the Public Disclosure Module (“PD”), Section PD-1.3: Disclosures in Annual Reports, CBB Rule Book - Volume II for Islamic Banks. The requirements of Section PD 1.3 follow the requirements of Basel II - Pillar III and the Islamic Financial Services Board’s (IFSB) recommended disclosures for Islamic banks.

This report contains a description of the Bank’s risk management and capital adequacy risk and practices, including detailed information on the capital adequacy process. The Bank has been in compliance with the minimum capital adequacy ratios prescribed by the CBB throughout 2008.

The disclosures in this report are in addition to or in some cases, serve to clarify the disclosures set out in the financial statements for the period ended 31 December 2008, presented in accordance with the Financial Accounting Standards (FAS) issued by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and International Financial Reporting Standards (IFRS). To avoid any duplication, information required under PD module but already disclosed in other sections of Annual report has not been produced in these disclosures.

2 Introduction

The new capital adequacy module of the CBB rule book was introduced with effect from 1 January 2008. The Basel II based framework provides a more risk sensitive approach for the assessment of risk and the calculation of regulatory capital i.e. the minimum capital that a bank is required to maintain. The framework intends to strengthen the risk management practices and processes within financial institutions. FEB has accordingly taken steps to comply with these requirements. The CBB’s capital management framework, consistent with the Basel II accord, is built on three pillars:

• Pillar I: calculation of the risk weighted amounts and capital requirement.

• Pillar II: the supervisory review process, including the Internal Capital Adequacy Assessment Process.

• Pillar III: rules for the disclosure of risk management and capital adequacy information.

2.1 Pillar I

Pillar I prescribes the basis for the calculation of the regulatory capital adequacy ratio. Pillar I defines the regulatory minimum capital requirements for each bank to cover the credit risk, market risk and operational risk inherent in its business model. It also defines the methodology for measurement of these risks and the various elements of qualifying capital. The capital adequacy ratio is calculated by dividing the regulatory capital base by the total Risk Weighted Assets (RWAs).

The resultant ratio is to be maintained above a predetermined and communicated level. Under the previously applied Basel I Capital Accord, the minimum capital adequacy ratio for banks incorporated in Bahrain was 12 per cent compared to the Basel Committee’s minimum ratio of 8 per cent. The CBB also requires banks incorporated in Bahrain to maintain a buffer of 0.5 per cent above the minimum capital adequacy ratio. In the event that the capital adequacy ratio falls below 12.5 per cent, additional prudential reporting requirements apply, and a formal action plan setting out the measures to be taken to restore the ratio above the target level is to be formulated and submitted to the CBB. Consequently, the CBB requires FEB to maintain an effective minimum capital adequacy ratio of 12.5 per cent.

Under the CBB’s Basel II capital adequacy framework, the RWAs are calculated using sophisticated and risk sensitive methods.


The table below summarizes the Pillar I risks and the approaches used by the Bank for calculating the RWAs in accordance with the CBB’s Basel II capital adequacy framework.

Risk Type Approach used by FEB

Credit risk Standardised Approach

Market risk Standardised Approach

Operational risk Basic Indicator Approach

2.2 Pillar II

Pillar II deals with the Supervisory Review and Evaluation Process (SREP). It also addresses the Internal Capital Adequacy Assessment Process (ICAAP) to be followed by Banks to assess the overall capital requirements to cover all relevant risks (including those covered under Pillar I).

Under the CBB’s Pillar II guidelines, each bank is to be individually assessed by the CBB and an individual minimum capital adequacy ratio is to be determined for each bank. Pending finalization of the assessment process, all banks incorporated in Bahrain are required to continue to maintain the existing 12 per cent and 8 per cent minimum capital adequacy ratios on consolidated basis and solo basis respectively.

The ICAAP incorporates a review and evaluation of risk management and capital relative to the risks to which the bank is exposed. FEB is currently developing an ICAAP around its economic capital framework which involves identification and measurement of risks to maintain an appropriate level of internal capital in alignment to the Bank’s overall risk profile and business plan.

2.3 Pillar III

In the CBB’s Basel II framework, the Pillar III prescribes how, when, and at what level information should be publicly disclosed about an institution’s risk management, governance and capital adequacy practices. The disclosures comprise detailed qualitative and quantitative information. The purpose of the Pillar III disclosure requirements is to complement the first two Pillars and the associated supervisory review process. The disclosures are designed to enable stakeholders and market participants to assess an institution’s risk appetite and risk exposures and to encourage all banks, via market pressures, to move towards more advanced forms of risk management.

Under the current requirements of the PD module, partial disclosure consisting mainly of quantitative analysis is required during half year reporting, whereas fuller disclosure is required to coincide with the financial year-end reporting.

3 Overall risk and capital management

3.1 Risk management strategy

FEB perceives good risk management capabilities to be the foundation in delivering results to customers, investors and shareholders. The Bank will continue to endeavor to adopt international best practices of risk management, superior corporate governance and the highest level of market discipline.

The primary objectives of the risk management strategy of the Bank are to:

• Manage risks inherent in the Bank’s activities in line with the risk appetite of the Bank;

• Strengthen the Bank’s risk management practices to reflect the industry best practices; and

• Align internal capital requirements with risk materiality.

The risk strategy is articulated through the limit structures for individual risks. These limits are based on the Bank’s business plans and guided by the regulatory requirements and guidlines. By defining the risk appetite, the Bank links its individual risks to its


strategy. The risk appetite defines the level of risk that FEB is prepared to take in order to achieve its objectives. The Bank reviews and realigns its risk appetite as per the evolving business plan of the Bank with changing economic and market scenarios. The Bank will also assess its tolerance for specific risk categories and its strategy to manage these risks. The risk appetite outlines the Bank’s risk exposures and defines its tolerance levels towards accepting or rejecting these risks. Tolerance levels are reflected in the limits defined by the Bank for each risk area.

3.2 Risk management framework

The Bank’s Board of Directors through its Risk Committee (a sub committee of the Board of Directors) has the responsibility for ensuring the establishment and effective implementation of an integrated risk management framework for the Bank. Further, the Risk Management Department is empowered to independently identify and assess risks that may arise from the Bank’s investing and operating activities; as well as recommend directly to the Risk Management Committee any prevention and mitigation measures as it deems fit. In addition, the Internal Audit function, which is also independent of both operations and the Bank’s investments units, shall assist in the risk management process.

3.3 Capital management

The Bank’s policy is to maintain a strong capital base and meet the minimum capital requirements imposed by the regulator (CBB), so as to maintain investor, creditor and market confidence and to sustain future development of the business. The impact of the level of capital on shareholders’ return is also recognised and the Bank recognises the need to maintain a balance between the returns and security afforded by a sound capital position.

The allocation of capital between specific operations and activities is primarily driven by regulatory requirements. The Bank’s capital management policy seeks to maximise return on risk adjusted basis while satisfying all the regulatory requirements.

The Bank ensures that the capital adequacy requirements are met and complied with regulatory capital requirements at all times. The Bank was not required to make any prudential deductions from its capital base as at 31 December 2008.

3.4 Risk types

As an Islamic investment bank dealing predominantly in alternative assets, the Bank is exposed to various risks in the normal course of its business and these risks include:

a. Credit risk

b. Market risk

c. Operational risk

d. Liquidity risk

e. Profit rate risk in banking book

f. Reputational risk

g. Strategic risk

h. Other risks (including Displaced commercial risk (DCR), etc.)

The details of components of risks and how they are managed are discussed in the following sections of this document.

4 Capital structure and capital adequacy ratio

4.1 Capital and group structure

The authorized share capital of the Bank is 2 billion shares of US$ 1 each. The paid up capital of the Bank is US$ 1 billion divided into 1 billion shares of US$ 1 each. As at 31 December 2008 the Bank did not make any investments in other entities and hence its capital assessed on an entity (solo) basis.


4.2 Capital adequacy

The Bank’s regulator (CBB) sets and monitors capital requirements for the Bank. In implementing current capital requirements CBB requires the Bank to maintain a prescribed ratio of 12% of total capital to total risk-weighted assets.

The Bank has adopted the standardised approach to credit and market risk and basic indicator approach for operational risk management under the revised framework. The Bank’s regulatory capital position at 31 December 2008 was as follows:

US$ 000’s

Tier 1 Tier 2 Total

Share capital 1,000,000 - 1,000,000

Statutory reserve 4 - 4

Retained earnings 38 - 38

Total eligible capital base 1,000,042 - 1,000,042

US$ 000’s

Risk weighted exposure Risk weighted exposure

Capital requirement @

12%

Credit Risk 405,238 48,629

Market risk - -

Operational 711,250 85,350

Total 1,116,488 133,978

Capital Adequacy Ratio 89.57%

Tier 1 capital adequacy ratio 89.57%

5 Credit risk

Credit risk is defined as the potential that a bank’s borrower or counterparty will fail to meet its obligations in accordance with agreed terms.

5.1 Credit risk management

The credit risk exposures faced by the Bank are in respect of its short term liquidity related placements with other financial institutions, and in respect of investment related funding made to projects. The investment related funding exposures arise in the ordinary course of its investment banking activities and are generally transacted without collateral or other credit risk mitigants. The Bank currently is not involved in the granting of credit facilities and as the Bank is not engaged in retail business, it does not use credit “scoring” models. The Bank does not perform a collective assessment of impairment for its credit exposures as the credit characteristics of each exposure is considered to be different. Risk is assessed on an individual basis for each receivable and has been reviewed by the Board of Directors as at 31 December 2008.


5.2 Capital requirements for credit risk

The Bank uses the Standardised Approach under the Basel II framework for measuring its credit risk. The Bank depends, where available on ratings from External Credit Assessment Institution recognised by the CBB (S&P, Moody’s, Fitch, and Capital Intelligence) for its banks’ counterparty exposures. Moreover, a detailed credit risk assessment of all obligors is performed independently by the credit risk management department, and approved by the Credit Committee.

Following is the components of credit risk as computed for regulatory capital adequacy purposes:

US$ 000’s

Exposure classGross credit

exposuresAverage risk

weights

Total credit risk weighted

exposure

Cash items 3 0% -

Claims on banks 976,362 20% 195,272

Exposure to corporate 169,498 100% 169,498

Others Assets 40,468 100% 40,468

Total self financed assets 1,186,331 92% 405,238

Total risk weighted exposure 1,186,331 - 405,238

Total regulatory capital required 48,629

The gross credit exposures are also representative of the average gross credit exposures.

5.3 Quantitative information on credit risk

For information related to the geographic and industry-wise concentration of credit risk exposures and maturity profile of financial assets, refer to the notes to the audited financial statements. The Bank did not have any exposure to highly leveraged and other high risk counterparties, past due, renegotiated or impaired credit exposures as at 31 December 2008.

5.4 Large exposures

Single exposures in excess of 15 % of the Bank’s capital base on individual counterparties require prior approval of CBB and are subject to prudential deduction treatment unless considered as exempt. As on date of balance sheet the Bank has certain exposures with banks which are exempt as per CBB rules hence the Bank does not have any such ‘large exposures’ that need prior approval of CBB. Exposure exceeding single exposure limit as of 31 December 2008 to a financial institution was US$ 633 million on account of short-term inter-bank placements.

6 Market risk

Market risk is the risk that changes in market prices, such as profit rates, equity prices, foreign exchange rates and credit spreads (not relating to changes in the obligor’s / issuer’s credit standing) will affect the Bank’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return on risk.


The Bank does not have a trading portfolio and/ or investment in equity instruments as at 31 December 2008 and hence is not exposed to market risk and other equity price risks in relation to such instruments. Further, the Bank’s major exposure is limited to GCC currencies, which are primarily pegged to the US Dollars. The Bank does not have significant net exposures denominated in other foreign currencies as at 31 December 2008. Hence, no capital has been allocated towards market risk as at 31 December 2008.

7 Operational risk

Operational risk is the risk of loss arising from systems and control failures, fraud and human error, which can result in financial and reputation loss, and legal and regulatory consequences. The Bank manages operational risk through appropriate controls, instituting segregation of duties and internal checks and balances. In addition the Bank is committed to the training of its staff.

The Bank uses the Basic Indicator Approach under the Basel II Framework for measuring its operational risk.

7.1 Operational risk management

Currently, the Bank conducts its business from a single location. Further, as this being the first year of its commencement of operations, the number of client relationships and volume of transactions at Bank are lower than at institutions having multi-location or retail operations.

Notwithstanding this, the Bank’s operations are conducted according to well-defined process and procedures. These process and procedures include a broad system of internal controls, including segregation of duties and other internal checks, which are designed to prevent either inadvertent staff errors or malfeasance prior to the release of a transaction.

This being the year of commencement of the Bank’s operations, the Bank is in the process of recruitment of key positions and implementing its systems, policies and procedures. The full implementation of the operations framework is expected to be completed by 2009.

7.2 Legal compliance and litigation

As on the reporting date, the Bank has no material legal contingencies including pending legal actions. The Bank’s legal risks are mitigated through legal counsel review of transactions and documentation, as appropriate. Where possible, the Bank uses standard formats for transaction documentation.

7.3 Sharia’a compliance

The Sharia’a Supervisory Board (SSB) is entrusted with the duty of directing, reviewing and supervising the activities of the Bank in order to ensure that they are in compliance with the rules and principles of Islamic Sharia’a. The Bank also recently appointed a dedicated internal sharia’a reviewer, who is responsible to perform an ongoing review of the compliance with the fatwas and rulings of the SSB on products and processes and also reviews compliance with the requirements of the Sharia’a standards prescribed by AAOIFI. The SSB reviews and approves all products and services before launching and offering to the customers and also conducts periodic reviews of the transactions of the Bank. An annual audit report is issued by the SSB confirming the Bank’s compliance with Sharia’a rules and principles.

7.4 Capital requirements for operational risk

The Bank adopts the Basic Indicator Approach to evaluate operational risk charge in accordance with the CBB capital adequacy module for Islamic Banks. According to this approach, Bank’s average gross income for three past financial years is multiplied by a fixed coefficient alpha of 15% set by CBB and a multiple of 12.5x is used to arrive at the risk weighted assets that are subject to capital charge. As the Bank has been recently set up, the Bank uses the 3 year budgeted gross income for computation of operational risk capital requirements.


Average gross income

Risk weighted assets

Capital charge at 12%

Operational risk 379,333 711,250 85,350

8 Liquidity risk

Liquidity risk is the risk that the Bank will encounter difficulty in meeting obligations arising from its financial liabilities. The Bank’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when they become due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Bank’s reputation.

The Board of Directors approve policies and strategies related to the management of liquidity. The Management reviews the liquidity profile of the Bank on a regular basis and any material change in the Bank’s current or prospective liquidity position is notified to the Board through respective management committees.

The following are the key liquidity ratios which reflect the liquidity position of the Bank:

Liquidity ratios31 December

2008

Liquid assets / Total assets 95.38%

Short-term assets / Short-term liabilities 46 times

Illiquid assets / Total assets 4.69%

Please refer note to 20 of the audited financial statements for a details of the maturity profile of assets and liabilities of the Bank.

9 Profit rate risk in the banking book

As a financial intermediary, FEB may encounter profit margin risks that arise from timing differences in the maturity and re-pricing of the Bank’s assets and liabilities. While such re-pricing mismatches are fundamental to the business of banking, these can expose a bank’s income and underlying economic value to unanticipated fluctuations as profit margins vary. This however, is not a major source of risk for the Bank.

The Risk Management Committee is responsible for recommending the profit rate policy, setting limits and guidelines. The ALCO is responsible for the overall management of the profit rate risk and monitoring the risk on a regular basis. ALCO also determines the borrowing and funding strategy of the Bank in order to optimize risk return trade off.

The Bank’s profit rate sensitive assets are mainly placements with financial institutions. The Bank does not currently have any profit bearing liabilities. Profit rate risk is managed principally through monitoring profit rate gaps and by having pre-approved limits for re-pricing bands. The Bank’s exposure to profit rate risk is currently considered to be limited due to the short-term nature of the funds invested in placements with financial institutions.

10 Reputational risk (non-performance risk)

Reputation risk is the risk that negative perception regarding the Bank’s business practices or internal controls, whether true or not, will cause a decline in the Bank’s investor base, lead to costly litigation that could have an adverse impact on liquidity or capital of the Bank. Being an Islamic Investment Bank, reputation is an important asset and among the issues that could affect the Bank’s reputation is the inability to exit from investments, lower than expected returns on investments and poor communication with investors. As at 31 December


2008, the Bank is not exposed to any significant reputational risk. The Bank intends to implement adequate policies and procedures to identify, monitor and address all potential risks that may arise from all such activities.

11 Strategic Risk

Strategic risk is the current and prospective impact on earnings or capital arising from adverse business decisions, improper implementation of decisions, or lack of responsiveness to industry changes. Strategic risk management practices are designed to ensure the comparability of the bank’s strategic goals, the resources deployed against these goals and the quality of implementation.

12 Other risks

Other risks include fiduciary risks, displaced commercial risk, regulatory compliance risks etc. which are inherent in all business and are not easily measurable or quantifiable. However, the bank has proper policies and procedure to mitigate and monitor these risks. The Bank’s Board is overall responsible for approving the risk strategies, risk policies and significant amendments to the risk policies. The Bank’s senior management is responsible for implementing the strategies and policies approved by the Board to identify, measure, monitor and control the risks faced by the Bank. The Bank as a matter of policy regularly reviews and monitors financial and marketing strategies, business performance, new legal and regulatory development and its potential impact on the Bank’s business, best corporate governance practices and implementation etc.


P.O. Box 209, Manama, Kingdom of Bahrain

Tel +973 17100001, Fax +973 17100002

www.1stenergybank.com

ANNUAL REPORT 2008 · Ebrahim Hussain Ebrahim Board Member Hesham Al Emadi Board Member Khalid...

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