ANNUAL REPORT 2012 · Mr. Al Jabr holds a Master Degree in BA from The University of Leicester - UK. He graduated as Electrical Engineer from King Fahd University of Petroleum and

ANNUAL REPORT 2012

First Energy Bank B.S.C.(c) is a closed joint stock company incorporated in the Kingdom of Bahrain with CR No.69089 and licensed as an Islamic wholesale bank by the Central Bank of Bahrain

FIRST ENERGY BANK ANNUAL REPORT 2012 1

CONTENTSAbout First Energy Bank Page 03

Board of Directors Page 04

Sharia’a Supervisory Board Page 08

Chairman’s Letter to Shareholders Page 10

Senior Management Page 12

Financial Highlights Page 16

Business Activities Page 18

Projects and Investments Page 20

Corporate Governance Page 25

Financial Statements Page 41

Risk and Capital Management Page 79

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

2 FIRST ENERGY BANK ANNUAL REPORT 2012


ABOUT FIRST ENERGY BANK

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 production, transportation, storage and refining of hydrocarbons, as well as oilfield

services and energy sector technologies. FEB also explores new opportunities to invest in the development of power generation

capacity and renewable energy technologies.

FEB 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 in June 2008, with an authorized share capital of US$2 billion, and a paid up capital of US$1 billion, consisting

of 2 billion ordinary shares each with a par value of US$1. The bank’s shareholders include a range of organizations and individuals

with interests in the energy sector from the Kingdom of Bahrain, the United Arab Emirates, Libya, the Kingdom of Saudi Arabia,

and other countries in the region.

In May 2012, FEB obtained the approval of the Central Bank of UAE to establish representative office in Abu Dhabi. The objective

of this office is to enhance business development and support the implementation of the Bank’s strategy by developing and

maintaining strategic relationship with financial institutions, investment banks, public and private investment corporations in

UAE and the rest of MENA region and to support the head office activities, act as point of contact, source of information, identify

and provide new business opportunities and market research.


BOARD OF DIRECTORS

H. E. Khadem Abdulla Al Qubaisi Chairman

Abdulfatah A. Enaami Vice Chairman

H. E. Abdulla Saif Al Nuaimi Vice Chairman

Abdulla A. Kareem Showaiter Board Member

Mohamed Badawy Al-Husseiny Board Member

Sadoun Barghash Al SadounBoard Member

Mohamed Ali Al FahimBoard Member

Ebrahim Hussain EbrahimBoard Member

Khalid Jassim Bin KalbanBoard Member

Adel Abdulaziz Al JabrBoard Member


H.E. KHADEM ABDULLA AL QUBAISI - ChairmanH. E. Khadem Al Qubaisi is the Managing Director of International Petroleum Investment Company (IPIC), a position he has held since May 2007. He is also the Chairman of Aabar’s Board of Directors and the Chairman of various international companies involved in the oil and gas and petrochemical industries including NOVA Chemicals, Borealis, and CEPSA.

He chairs the boards of Takaful and Arabtec Holding. He is a Member of the Boards of ChemaWEyaat and the Emirates Investment Authority. Regionally, he chairs Bahrain’s First Energy Bank.

He holds a B.Sc. in Economics. He was named in Gulf Magazine’s 2012 list of the Top 100 World’s Most Influential Arabs, and included in the Oil & Gas Power Middle East top 50 in 2011. In 2009, he was voted Arabian Businessman of the Year and received the coveted #1 Award as the ICIS Power Player of the Year.

H.E. Khadem Al Qubaisi served as a key figure on many management teams throughout the financial industry with a broad work experience of over 19 years.

ABDULFATAH ABDULSALAM ENAAMI - Vice ChairmanMr. Enaami is the Head of Direct Investment Department in the Libyan Investment Authority. Mr. Enaami has a degree in Business & Finance from the University of Sheffield City Polytechnic, UK in 1987, and he has over 19 years of finance and investment experience. In 1994, Mr. Enaami joined the Libyan Foreign Bank in the International Finance Department, he participated in tasks involving: international loan agreements, oil project finance in Libya, rescheduling of Latin American debts and managing Latin American bond portfolio. In 2004, he was entrusted to create an Investment Portfolio Department and managed US$ 2.5 billion worth of investments. In 2008, he joined the Libyan Investment Authority to head the Equities Investment Department, managing US$ 8.5 billion worth of investments.

H.E. ABDULLA SAIF AL NUAIMI - Vice ChairmanH.E. Abdulla Saif Al Nuaimi, a national of the United Arab Emirates was born in UAE in 1969. He graduated in 1992 with a B.A. in Business Administration in Management from Emirates University, UAE.

After completing several graduate courses in the United States of America, he joined the Abu Dhabi Investment Authority (ADIA) as a Senior Analyst specializing in the US market from 1992 through 1997 he was responsible for analyzing US companies for investment opportunities and preparing recommendations for selling and buying shares.

In 1997, Abdulla Saif Al Nuaimi was seconded to the Privatization Committee for the Water & Electricity Sector in the Emirate of Abu Dhabi (PCWES) as a Director for the Independent Water and Power Producers Projects (IWPP). On the first of January 1999 after the issuance of the Transfer Scheme, H.E. Al Nuaimi became the Director of Privatization of ADWEA. During his tenure in this position in which he continues to hold, Eight IWPP, Two Sewerage treatment and Sohar Aluminum Smelter projects were established with all legal, financial & technical issues.

Along with his position in ADWEA as a General Director and Director of Privatization H.E. Abdulla Saif Al Nuaimi is the Vice Chairman of TAQA where he has served as a director of the Board since 2005.

He is also the Chairman of Abu Dhabi Distribution Company, Taweelah Asia Power Company and Gulf Power Company, Vice Chairman of Gulf Total Tractable Power Company and a board member of Emirates Power Company, Abu Dhabi Water Electricity Company, Federal Electricity & Water Authority, First Energy Bank, and a member in the Executive Council Infrastructure and Environment Sub Committee.

Previously His Excellency has held the positions of Managing Director and Chief Executive Officer of TAQA, Deputy Chairman of Al-Ain Distribution Company, Chairman of Al Wathbah Central Services Company, and Board member of Abu Dhabi Sewerage Services Company and the Oman Insurance Company. H.E. Al Nuaimi has more than 21 years of experience.


ABDULLA ABDULKARIM SHOWAITER - Board Member

Mr. Showaiter is the Deputy Chief Executive Officer of Emirates Islamic Bank with a total of 35 years of work experience. He is a Board member in

numerous financial institutions and companies such as Khaleeji Commercial Bank, Al Salam Bank - Sudan and Arab Drilling Workover Company – Libya

(ADWOC) .

MOHAMED ALI AL FAHIM - Board Member

Mr. Al Fahim was born on 4 March 1976. He has a degree in Finance from the University of Suffolk, Boston (1999).

Mr. Al Fahim has around 14 years working experience, he commenced his professional career at Abu Dhabi National Oil Company (ADNOC), where

he worked from 2000 to 2008. His role as Head of Group Financing Department focused on the identification and pursuit of investment strategies

reflecting a balanced investment portfolio. During that time, Mr. Al Fahim also worked as a corporate finance consultant for KPMG-Dubai (2001-

2002) and for HSBC Bank at the Project and Export Finance Division-London (2006).

Since September 2008, Mr. Al Fahim has been Head of Finance at the Finance & Accounts Department of International Petroleum Investment

Company (IPIC).

Mr. AL Fahim represents IPIC as a board member on various boards of investee companies, including: EDP General and Supervisory Board, Aabar

Investments PJS, Arabtec Holdings PJSC, First Energy Bank, Unicredit Spa and Al Izz Islamic Bank.

SADOUN BARGHASH AL SADOUN - Board Member

Mr. Sadoun Worked in Several oil and gas companies such as: KNPC, Petromin and Saudi ARAMCO with a total experience of 23 years. He graduated

in 1980 as a Mechanical Engineer. Mr. Sadoun 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.

MOHAMED AL HUSSEINY - Board Member

With 24 years experince and an international mandate, credited with developing and engaging in some of the most diverse investment, finance and

globally important industries, Mr. Al-Husseiny has a pivotal role in advising and guiding in a Directorial capacity on several boards around the world.

With Aabar Investments PJS since its inception Mr. Al-Husseiny has been Chief Executive Officer since 2009. Mr. Al-Husseiny has spearheaded a

platform of development within the oil and gas, aerospace, automotive and realestate sectors, resulting in sustained revenue growth for the company

and its partners.

Mr. Al-Husseiny’s other remits include Director of CEPSA, Spain, Virgin Galactic, USA, Nova Chemicals, Canada, 1MDB Energy in Malaysia and First

Energy Bank in Bahrain. Combining a career of multiple leadership roles and advisory positions, Mr. Al-Husseiny brings a plethora of knowledge and

experience to the firms he is involved with. Mr. Al Husseiny is a member of the American Institute of Certified Public Accounts, and holds a Bachelor

of Science in Accounting from Louisiana State University, and is a licensed as a Certified Public Accountant by the State of Texas.

Board of Directors (continued)


ADEL ABDULAZIZ AL JABR - Board Member

Mr. Al Jabr is a Board Member of Al Jabr Trading Company “premier regional leading group of companies in fields of Auto Motors

(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. Al Jabr represents Al Jabr

Group of Companies with a total experience of 22 years.

Mr. Al Jabr holds a Master Degree in BA from The University of Leicester - UK. He graduated as Electrical Engineer from King Fahd

University of Petroleum and Minerals - KSA in 1990.

KHALID JASSIM BIN KALBAN - Board Member

Mr. Kalban Managing Director and Chief Executive Officer of Dubai Investments, and member of the Board of directors of Islamic

Bank of Asia – Singapore ,Thuraya Satellite Communications-Telecommunications Company, National General Insurance, Takaful

Re LTD – Dubai . He is also the Chairman of Union Properties, Vice Chairman of Arab Insurance Group. Mr. Kalban also has a wide

experience and thorough knowledge in managing big establishments, particularly those specializing in insurance services, financial

services, chemicals and communications. His experience was gained during his career of 30 years.

Mr. Kalban holds a BS.C in Science & Arts from Metropolitan State College - Denver - Colorado - USA.

EBRAHIM HUSSAIN EBRAHIM - Board Member

Mr. Ebrahim Hussain Ebrahim, a Bahraini national, is currently Board Member of Khaleeji Commercial Bank BSC. He was the Chief

Executive Officer of Khaleeji Commercial Bank until May 2012 and was instrumental in establishing the bank in 2004. He has around

32 years’ experience in both Islamic and conventional banking and has worked with a number of prominent financial institutions in

Bahrain. Prior to joining Khaleeji Commercial Bank, Mr. Ebrahim was the Chief Executive Officer of the Liquidity Management Centre,

Bahrain. In his long stint at Arab Banking Corporation, he held various positions including Vice President in the Global Marketing Unit,

Vice President in the Treasury and Marketable Securities Department, and General Manager of ABC Securities. He also worked as

General Manager of Bank of Bahrain and Kuwait’s Financial Services Company in addition to holding senior positions in the treasury

and financial institutions division of Shamil Bank. Mr. Ebrahim is currently a board member of First Energy Bank - Bahrain and Gulf

Real Estate Company – Saudi Arabia.

Mr. Ebrahim Hussain holds a BS.C in Economics from The University of Kuwait. Mr. Hussain holds a Master Degree in BA from the

University of Bahrain.

KHALID MOHAMED NAJIBI - Board Member (till June 2012 when his term was expired).


Sheikh Nizam Mohammed Saleh Yaqubi

Sheikh Nizam Mohammed Saleh Yaqubi 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.

Sheikh Nizam 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.

Sheikh Dr. Mohamed Ali bin Ibrahim Elgari

Dr. Mohamed Ali bin Ibrahim Elgari is an Islamic Economics Professor at the King Abdulaziz University in the department of Economics and Administration.

In addition to his position at the King Abdulaziz University, he is affiliated with a number of organizations and financial institutions. Among them being a member of the Sharia’a committees at the National Commercial Bank, Islamic Citibank, Arab National Bank and the Dow Jones Islamic Index. Dr. Elgari is also on the editorial Boards of several Islamic journals, and an advisory member on the Harvard Series on Islamic Law. He also held the title of director of the Centre for Islamic Economics Research.

Dr. Elgari has participated in various conferences and seminars, both locally and overseas. Extensive research in the field of Islamic economics and finance has lead to a number of his works published in recognized journals and presented at relevant conferences. Among them being topics on fiscal deficit in Islamic economics, setting up Sharia’a compliant credit cards and banking systems, role of Islamic mutual fund and risk management, and issues facing Islamic banks and investments.

A handful of Dr. Elgari’s research is expected to be published in the future. Dr. Elgari holds PhD in Economics from the University of Berkley, California.

Sheikh Dr. Osama Mohammed Saad Bahar

Sheikh Bahar is a prominent, highly-respected Sharia’a scholar from Kingdom of Bahrain.

He is currently Head of the Sharia’a Compliance and Advisory at First Energy Bank, following earlier senior positions at Islamic banks in Bahrain including Head of Sharia’a Compliance at Al Salam Bank and before that, Sharia’a Compliance Officer at ABC Islamic Bank.

Sheikh Bahar is also a Member of the Sharia’a Supervisory Board of the Global Banking Corporation, International Investment Bank, Allianz Global Investors, Allianz Takaful (Bahrain), International Tharawat and Family Bank; and Sharia’a Advisor for Sakana Holistic Housing Solutions and Reef (Real Estate Finance).

Sheikh Bahar was awarded his Doctorate degree from Lahaye University in Holland, his Master Degree from Al Emam Al Awzae University in Lebanon and his Bachelor degree in Islamic Sharia’a from Prince Abdul Qader University of Islamic Studies in Algeria.

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

SHARIA’A SUPERVISORY BOARD



Dear Shareholders,

In the name of Allah, the beneficent, the merciful, prayers and peace upon the last apostle and messenger, our prophet Mohammed and his companions.

On behalf of the Board of Directors, it is my privilege to present the annual report and consolidated financial statements of First Energy Bank B.S.C. (“FEB”) for the year ended 31 December 2012. In what proved to be a very challenging year for the Energy sector, the Bank responded in a proactive manner to address the various challenges.

FINANCIAL HIGHLIGHTS FOR YEAR-END 2012In my letter to Shareholders last year, I stated that our performance for 2012 would be significantly better than 2011.I am pleased to report that the financial results for the year 2012 have, in fact, shown remarkable improvement compared to the year 2011. Net profit for the year 2012 has increased to $37 million, tenfold increase compared to $3.5 million in 2011. Gross income for the year 2012 has increased to $77.2 million compared to $25.5 million in 2011. Balance sheet footing has increased to $1.4 billion in 2012 compared to $1.23 billion in 2011.

INVESTMENTS UPDATEFEB’s investment portfolio continued to grow and be profitable during 2012. I am pleased to inform you MENAdrill demonstrated significant success in terms of increased profitability and cash flow generation. Both the rigs are operating satisfactorily. Another noteworthy investment made in the first quarter of 2012 was the acquisition of a new Airbus A330 aircraft which is leased to Malaysian Airlines. During the second half of the year, the Bank also made a strategic investment as a Founding shareholder in Alizz Islamic Bank (SAOG) which is one of the only two licensed full Islamic banks in the Sultanate of Oman. As part of its license requirement, Alizz successfully closed its Initial Public Offering with an oversubscription and was listed on the Muscat Securities Exchange in November 2012. This investment complements FEB’s operations to become a leading Islamic financial institution regionally and internationally.

WAY FORWARDThe prospects for 2013 appear promising. Although there are significant challenges facing the global economy, I am confident that FEB will continue to rise to these challenges and deliver a performance that meets the expectations of our shareholders. The Bank will continue pursuing its investment strategy targeting a balanced portfolio that achieves constant cash generation in addition to providing growth on capital and value to its shareholders.

Finally, it is with pride that I say none of our accomplishments throughout 2012 would have been possible without the dedication and commitment shown by the Bank’s management and staff. I would like also to take this opportunity to express our gratitude our valued shareholders for their continuous support and their on-going confidence and loyalty reposed by them in First Energy Bank.

Yours truly,

Khadem Abdulla Al Qubaisi

CHAIRMAN’S LETTER TO SHAREHOLDERS



MOHAMED SHUKRI GHANEM - Acting Chief Executive Officer

Ghanem brings to First Energy Bank (“FEB” or the “Bank”) over 13 years of extensive experience in the regional financing market and in global energy issues. He is responsible for the overall management of the organisation in line with the organisations strategic plan and also responsible for monitoring organisational performance against the strategic plan, working with staff to stay on target and looking ahead to the long term development of the organisation operationally and strategically.

In addition to the Acting CEO role, he has the overall responsibility for the investment and investment placement functions at FEB, including the design and implementation of investment processes for all clients as well as marketing and product placement. He 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 responsible for expanding the client base by ensuring the investment strategy is solid and sustainable.

Prior to joining FEB, Ghanem worked at Arab Banking Corporation (BSC) (“ABC”) as part of 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.

Ghanem also 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.

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

SENIOR MANAGEMENT


KALYAN SUNDERAM - Chief Risk Officer

Over 36 years of comprehensive financial services experience in domestic and international banking and government finance.

Prior work experience primarily with HSBC, Bank of Bahrain & Kuwait, Province of Nova Scotia, Canada, and Bahraini Saudi Bank in successively senior management positions.

Most recent position prior to joining FEB in March 2010 was Chief Risk Officer & Deputy CEO of Bahraini Saudi Bank for 6 years.

Kalyan brings to FEB wide ranging experience in all major segments including: commercial retail banking, wholesale investment banking, Islamic finance, treasury capital markets, public private partnerships, government infrastructure financings, strategy formulation and execution, gained in developed and emerging regional markets. His functional specialization is all aspects of Risk Management.

As Chief Risk Officer at FEB, he is responsible for the ongoing development, installation, and maintenance of an integrated enterprise risk management framework (ERM) within FEB. In addition to his risk related responsibilities, Kalyan is also a member of the Executive Management team vested with responsibility for executing the strategy approved by the Board.

His commitment to ensuring best practices in risk management regionally and globally is derived from his involvement with the Professional Risk Managers’ International Association (PRMIA) as the first Regional Director of the Bahrain Chapter and an active member of the Education Committee. He is also an independent non-executive Director of National Finance House B.S.C. Bahrain.

His qualifications include: MBA, Syracuse University, NY; ACIB (London); CFA; PRM.

RAMZI AL SEWAIDI - Head of Investment Banking

Ramzi brings to First Energy Bank (FEB) over 19 years of international and regional experience in the investment and commercial banking sectors.

Ramzi is mainly responsible of identifying and leading the implementation of income generating investment opportunities for FEB through direct investments and in the venture capital space.

Prior to joining FEB, Ramzi worked at Arab Banking Corporation (BSC) (”ABC”) as First Vice President leading project finance and advisory services in the GCC countries and particularly in Saudi Arabia. He also worked with Gulf International Bank and with HSBC Bank of Canada.

Al Sewaidi holds a Bachelor of Science Degree (Business Administration) from Suffolk University, Boston, MA and holds an MBA from the same university.

DAVID HUDSON - Head of Legal & Compliance

David, an English solicitor, brings to First Energy Bank (FEB) over 27 years of international legal and advisory experience in different areas of the banking industry.

David advises the ACEO and senior management on legal matters. He also oversees FEB’s compliance function, reporting to the Board Audit Committee and (at the functional level) advising senior management and other staff on compliance issues.

Prior to joining FEB, David was a senior counsel and group compliance officer for Arab Banking Corporation (BSC) and manager of Norton Rose’s Bahrain office.

David holds a Bachelor of Laws from the University of Bristol and a Diplôme d’Etudes Supérieures Universitaires from Université Aix-Marseille (France).


EIHAB ABDUL LATIF AHMAD - Corporate Secretary / MLROEihab brings to First Energy Bank (FEB) over 18 years of regional legal and compliance experience.

Eihab is the Corporate Secretary of FEB and is responsible for providing wide range of services to the Bank including, but not limited to, Board Secretary function, legal and compliance advisory services to the Board of Directors, the focal point of communication with the Board of Directors, Senior Management and Shareholders, providing advice on Corporate Governance principles and practices. He is also approved by the Central Bank of Bahrain as the Money Laundering Reporting Officer (MLRO) to handle all anti money laundering and anti terrorism issues within the bank.

Prior to joining FEB, Eihab worked at the International Investment Bank as Head of Legal & Compliance.

Eihab holds a LL.B – Faculty of Law from the University of Khartoum, Sudan, Sudanese Board of Law Practicing and a Certificate of Certified Compliance Officer (CCO) from the American Academy of Financial Management – Dubai, UAE.

ESAM EBRAHIM AL MAHMEED - Head of Treasury and Financial InstitutionsOver 26 years of comprehensive financial services experience in international, Islamic and investment banking.

Prior work experience primarily with Arcapita Bank, Arab Banking Corporation, The Arab Investment Company and Arab Insurance Group in successively senior management positions.

Esam brings to FEB extensive finance and investment banking experience especially in Islamic finance both syndication and Sukuk, treasury money and capital markets, Ijara debt financings, outsourcing investment opportunities, strong global network in the banking community and proven leadership capabilities to build and lead a professional team to contribute to the overall objective of the bank. His commitment to ensuring best practices in treasury and building up business relationships with major financial institutions in the regional and global financial markets to achieve the overall objective of FEB.

As Head of Treasury and Financial Institutions at FEB, he is responsible for all banking relationships with all financial institutions, enhancing and strengthening the existing as well as to continuously look for potential relationships for FEB. At the same time, managing the overall treasury department activities in terms of liquidity management to support the ongoing needs and expansion of the bank as well as the Sukuk portfolio to contribute to the bottom line of FEB. Esam is a member of FEB’s senior management team and Vice Chairman of the Asset and Liability Committee (ALCO).

Esam holds a BBA from Saint Edward’s University, Austin – Texas, USA.

KHALED HEJRES - Head of Operations & Support ServicesKhaled brings to First Energy Bank (FEB) over 22 years of experience in retail, wholesale and investment banking sectors.

Khaled is mainly responsible for planning, directing and controlling FEB’s support and back office functionalities involving Human Resources, Administration, Information Technology, IT Security and Operations ensuring efficient processing and implementation of robust banking technologies.

Prior to joining FEB, Khaled worked at First Real Estate Company as Chief Operating Officer. Khaled holds a Bachelor of Arts Degree (Economics) from University of Pune, India and holds an Advanced Diploma in Banking from Bahrain Institute of Banking & Finance.

OSAMA BAHAR - Head of Sharia’a Compliance & AdvisoryOsama brings to First Energy Bank (FEB) 19 years of experience in the field of Sharia’a compliance and advisory.

He is primarily responsible for providing Sharia’a guidelines and assisting the business lines in structuring the Sharia’a compliant offerings. The Head of Sharia’a Compliance and Advisory is also a primary liaison between the Bank and the Sharia’a Supervisory Board (SSB).

Prior to FEB, he worked at Al Salam Bank as Head of Sharia’a Compliance.

Osama holds a PhD from Lahaye University - Holland and a bachelor degree in Islamic Sharia’a from Prince Abdul Qader University of Islamic Studies in Algeria, as well as Masters Degree in Islamic Studies from Al Emam Al Awzae University in Beirut.

Senior Management (continued)


YOUSIF AHMED EBRAHIM - Head of Financial Control

Yousif has over 19 years of experience in the banking industry, mainly in the fields of internal audit and financial control. He is primarily responsible for ensuring that applicable accounting standards, financial policies and procedures are applied efficiently and effectively across the Bank.

He is also responsible for formulating, approving, and controlling the structure of the Bank’s accounts, accounting methods and procedures employed by the Bank to ensure all financial transactions comply with applicable laws and regulations.

Prior to joining First Energy Bank, he worked for Gulf International Bank as Vice President, Internal Audit as well as PricewaterhouseCoopers, Audit & Business Assurance Services.

Yousif is a Certified Public Accountant (USA) and a member of the American Institute of Certified Public Accountant.

YOUSSEF EL HABETY - Head of Strategic Planning & Business Development

Youssef brings to First Energy Bank (FEB) over 15 years of experience in the field of international trading, portfolio investments as well as marketing.

He is primarily responsible for managing large investment projects for FEB with an objective to maximize revenue and asset growth opportunities, by sourcing, transacting and developing deals across North Africa ensuring adequate sectoral / technical understanding in the process.

Prior to FEB, Youssef worked for the Libyan Investment Authority as Deputy Head of portfolio Investment & Head of energy & renewable team assisting the CEO & DCEO in managing and organizing the institution during establishment.

Youssef holds B. Sc Degree in Political Science from Tripoli University, B.A Degree in Business Administration from the African Management College, Higher Diploma in Business Management form London School of Business and Finance.

While working for the Libyan Investment Authority he has been a Director of Social Economic Development Fund , National Commercial Bank and Chairman of Altadamon General Co.


The Bank delivered a net profit of USD 37.0 million in 2012 (2011: USD 3.5 million). Gross income increased by 202.7% to USD 77.2 million.

The growth in profits is mainly attributable to increase of the Bank’s stake in Menadrill Investment Company which resulted in a conversion

of the associate into a 59.44% owned subsidiary. In addition there was an increase of profit from the Bank’s Sukuk portfolio by 138%. The

Bank’s efforts towards cost efficiency were reflected in the cost to income ratio which improved significantly to 46.7%. The Bank’s capital

adequacy ratio was 90.82%; much higher than the Central Bank of Bahrain’s minimum limit of 12.0%.

Following are the key highlights of the financial results:

Amounts in USD ‘000

2012 2011 2010 2009

• Gross Income 77,175 25,493 41,391 47,410

• Operating Expenses (36,074) (20,689) (24,119) (24,476)

• Impairment Allowances (4,077) (1,260) (27,396) (8,734)

• Net (Loss) / Income 37,024 3,544 (10,124) 14,200

• Total Assets 1,400,464 1,230,697 1,199,844 1,233,919

• Total Equity 1,159,579 1,042,702 1,039,086 1,054,677

• EPS (basic) in US Cents 3.70 0.35 (1.01) 1.42

• Return on Average Assets 2.73% 0.30% (0.86%) 1.27%

• Return on Average Equity 3.59% 0.34% (0.96%) 1.39%

• Net Income Margin 47.97% 13.90% (24.46%) 29.95%

• Operating Expenses to Gross Income Ratio 46.74% 81.16% 58.27% 51.63%

• Total Expenses to Gross Income Ratio 52.03% 86.10% 124.46% 70.05%

FINANCIAL HIGHLIGHTS



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 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 expected recovery in the energy industry demand growth creates attractive opportunities for mergers and acquisitions (M&A). FEB’s considerable

financial strength, will allows 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 structuring and financial advisory services, deriving 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.

CAPITAL MARKETThe Islamic capital market has been growing rapidly in the last decade through the increasing Sharia’a compliant Sukuk, structured products and hedging instruments mainly by sovereigns, quasi-sovereigns, internationals, supra-nationals and corporate institutions. FEB’s competent team is committed to develop and execute long-term strategic and tactical plans to meet portfolio return objectives and continuously innovate and evaluate investing and financing solutions.

First Energy Bank’s (FEB) business model is built around 7 core business lines: Project Development, Private Equity, Mergers and Acquisitions, Islamic Financing, Capital Market, Asset Management and Treasury.

BUSINESS ACTIVITIES


ASSET MANAGEMENTInvestors’ demand for Sharia’a compliant investment products has been increasing in recent years. FEB’s strategy is to provide innovative, diversified and well managed products that suit its clients’ needs and meets their return requirements. The FEB team is committed to continuously developing products and 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 able 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 compliant products managed by a team of dedicated personnel to build a stable platform to cater for FEB’s mandated business requirements.


SAUDI POLYSILICON

Saudi Polysilicon is a world class polysilicon production facility. The first of its kind and scale in the region, it will be located in the Kingdom of

Saudi Arabia, and will cover a total area of 375,000 square meters in Al Jubail Industrial City 2.

The project is spearheaded by the strategic partner, First Energy Bank (FEB). It is being sponsored and developed by Cosmos Industrial Investment

Corporation, a subsidiary of FEB.

The project will use advanced and commercially proven technologies in its production processes deriving benefits from the economies of scale

and will be one of the lowest cost polysilicon producers in the world. It is expected to have a total production capacity of 7,500 tons per annum

of high quality polysilicon product capable to cater users in the solar photo voltaic power as well as electronics industry markets. The polysilicon

project is expected to begin production in the third quarter of 2017.

MENADRILL INVESTMENT COMPANY

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

contract-drilling services for offshore exploration and development globally.

MENAdrill’s aim is to be 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 and globally. MENAdrill’s initial assets include two Super M2 jackup

drills constructed at the Maritime Industrial Services (MIS) in Sharjah. In May 2011, the first rig “MENAdrill I” successfully commenced drilling in

Mexico for PEMEX- Exploración Producción (“PEP”), the national oil company of Mexico, and MENAdrill II started in September 2012 on a similar

contract to MENAdrill I. MENAdrill signed a 3 year US$ 130 Million limited recourse Islamic financing with Gulf International Bank B.S.C. as the

Mandated Lead Arranger and Investment Agent to part finance its first rig namely MENAdrill I.

MENAdrill achieved net profitability during its first operation year.

ARAB DRILLING AND WORKOVER COMPANY (“ADWOC”)

FEB has acquired a 40% stake in the Arab Drilling and Workover Company (ADWOC), one of the leading oil and gas onshore contract drilling and

workover companies based out of Libya. Established in 1980, ADWOC has been providing its drilling and workover services across the Arab World. The

ADWOC acquisition fits well into FEB’s investment portfolio as it provides the Bank with the diversity and strong foundation necessary to support

future expansion in this sector. Additionally, it complements some of the other investments that the Bank is involved in, including the offshore

drilling investment of MENAdrill. ADWOC enjoys long standing relationships with the major oil companies in Libya and operates a highly mobile fleet

consisting of 10 drilling rigs, 7 workover rigs and 8 leased rigs.

Following the political unrest and crisis in Libya, ADWOC successfully restarted its operations in October 2012.

PROJECTS AND INVESTMENTS


MENAdrill I


AL-DUR POWER AND WATER COMPANY B.S.C. (C)

During 2009, FEB successfully completed approximately 9% stake acquisition in the Al Dur Independent Water and Power Project (IWPP). This

co-investment with IPR-GDF SUEZ META and Gulf Investment Corporation is part of FEB’s strategy of building up a book of top quality energy

related infrastructure assets.

The Al Dur project, which is the largest of its kind in the Kingdom of Bahrain, successfully commenced operation during the first quarter of 2012.

The project is located on the southeast coast of the Kingdom and is valued at a total of USD2.2 billion. Its production capacity is 1,234 megawatts

of power and 48 million gallons of water per day. The plant utilizes mainly GE turbines for the two power blocks and Reverse Osmosis (RO) as its

water desalination technology. This project represents an important addition to the Kingdom of Bahrain and will help meet the rising demand

for both power and electricity going forward. The Bahraini Electricity and Water Authority (‘EWA’) is the sole off-taker of the plant output as

stipulated in the 25-year Power and Water Purchase Agreement.

FEB-NOVUS AIRCRAFT HOLDING LTD – MALAYSIA AIRLINES

In 2012, FEB successfully closed a Purchase and Lease Transaction of A330-300 Aircraft to Malaysia Airlines, the flag carrier of Malaysia and one

of the world’s leading airlines. FEB partnered with Novus Aviation Limited, a market leader in the aviation leasing industry, specialists in aircraft

sourcing, trading, leasing, financing and remarketing. The Airbus A330-300 is a twin-engine, high capacity wide-body commercial aircraft fitted

with two Pratt & Whitney PW 4170 engines. This transaction introduces diversification to the bank’s asset classes generating stable and sustained

income.

AL IZZ ISLAMIC BANK, OMAN

FEB is a promoter of one of the first Islamic banks in Oman. Al Izz Islamic Bank (“Al Izz”) intends to offer Islamic banking products and services,

operate various types of deposit accounts and offer a wide array of tailored products such as Murabaha, Istisna’a, Musharaka and Ijara along with

other innovative Islamic products and services designed to meet the needs of the Omani market.

Al Izz is focused on becoming the Islamic Bank of choice for customers seeking comprehensive business and retail Islamic Banking solutions. Al Izz

intends to become the market leader for Islamic Banking products and services by leveraging its early mover advantage to gain market share.

The IPO was successfully closed on October 21, 2012 and was oversubscribed.

Projects And Investments(continued)


Al Dur Independent Water and Power Project (IWPP)



CORPORATE GOVERNANCE


Board of Directors

Nomination, Remunerationand Governance Committee

Board Audit and RiskCommittee

Board InvestmentCommittee

Sharia’a Board

Internal Audit Compliance Corporate

Secretary/MLRO Risk Sharia’a

Coordinator

Acting CEO

Legal Treasury

and Capital Markets Investment Banking Operations

and Support Services Financial Control

Corporate 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:

CORPORATE GOVERNANCE


BOARD OF DIRECTORSFEB’s governance structure comprises the main Board of Directors (the Board) and its sub-committees.

Currently the Board of Directors of FEB comprises 10 Directors. Their term started June 2011 and will expire June 2014 and their names are listed below:

No. Name Type of Membership Exec/Non-exec

1 H. E. Khadem Abdulla Al Qubaisi Chairman Exec

2 Abdulfatah Abdulsalam Enaami Vice Chairman Non-Exec

3 H. E. Abdulla Saif Al Nuaimi Vice Chairman Exec

4 Abdulla Abdulkarim Showaiter Member Exec

5 Mohamed Badawy Al-Husseiny Member Non-Exec

6 Mohamed Ali Al Fahim Member Non-Exec

7 Sadoun Barghash Al Sadoun Member Exec

8 Ebrahim Hussain Ebrahim Member Non-Exec

9 Adel A. Aziz Al Jabr Member Exec

10 Khalid Jassim Bin Kalban Member Exec

BOARD COMMITTEES

There are Three Board sub-committees, namely: The Board Audit & Risk Committee, The Nomination, Remuneration and Governance Committee and The Board Investment Committee. Each is required to report its activities to the Board on a regular basis, their functions and membership are described as follows:

1- Board Audit Committee (BAC)*

The Committee assists the Board in fulfilling its oversight responsibilities by reviewing the financial information provided to the shareholders and others, the systems of internal controls which the management and the Board have established. The audit process acts as an informed, vigilant and effective oversight of the Bank’s internal controls and financial reporting systems. The Committee assists in the selection and compensation of the external auditor for appointment and approval at the shareholders’ meeting. It also provides an open avenue of communication between the Board, management, the internal auditors and the independent external auditors.

2- Board Risk Committee (BRC)*

This Committee makes recommendations to the Board in relation to the Bank’s overall risk appetite and tolerances and the management of credit, market, operational, liquidity and other risks the Bank faces in carrying out its activities. It assists the Board to approve and monitor overall risk management by developing across all business activities and operations policies, internal controls, methods of risk management, compliance procedures and methods of reporting to the Board.

* With effect from September 2012 the above committees were merged into one committee named Board Audit and Risk Committee (BARC) with roles remaining unchanged.


3- Nomination, Remuneration and Governance Committee (NRGC)The Nomination, Remuneration and Governance Committee, mindful of best practice in the field, assists the Board in formulating and reviewing the Bank’s relevant policies and rules including the administrative policy and governance requirements. It handles the nomination, remuneration, and governance compensation of the Board and Executive Management and regularly reviews the Bank’s succession plan.

4- Board Investment Committee (BIC)The Investment Committee assists the Board in formulating the Bank’s investment policy and making investment transaction decisions. The BIC reports its activities to the Board of Directors on a quarterly basis.

Board and Sub-Committees Meetings as of 31 December 2012* and members attendance for each (Table 1):

Board of Directors Minimum Board Meetings per year is 4 meetings

No. Name Type of Membership 4 Board Meetings Held Date of Meetings

1 H.E. Khadem Abdulla Al Qubaisi Chairman 3

15/2/2012

11/6/2012

18/9/2012

14/11/2012

2 Abdulfatah Abdulsalam Enaami Vice Chairman 4

3 H.E. Abdulla Saif Al Nuaimi Vice Chairman 2

4 Abdulla A. Karim Showaiter Member 4

5 Mohamed Badawy Al-Husseiny Member 3

6 Mohamed Ali Al Fahim Member 4

7 Sadoun Barghash Al Sadoun Member 4

8 Ebrahim Hussain Ebrahim Member 3

9 Adel A. Aziz Al Jabr Member 4

10 Khalid Jassim Bin Kalban Member 2

*H.E. Hamad Rashid Al Neaimi resigned February 2012 *Mr. Khalid Mohamed Najibi’s term expired June 2012

Board Audit Committee (BAC) Minimum BAC Meetings per year is 4 meetings

No. Name Type of Membership 3 Meetings Held Date of Meetings

1 Ebrahim Hussain Ebrahim Chairman 3 15/2/20125/5/20128/8/2012

2 Mohamed Ali Al Fahim Member 3

3 Khalid Jassim Bin Kalban Member 2

Board Risk Committee (BRC) Minimum BRC Meetings per year is 4 meetings


1 Khalid Mohamed Najibi* Chairman 27/5/2012

11/6/20122 Adel Abdulaziz Al Jabr Member 2


*Mr. Khalid Mohamed Najibi’s term expired June 2012

Corporate Governance (continued)


Nomination, Remuneration & Governance Committee (NRGC) Minimum NRGC Meetings per year is 4 meetings


1 H.E. Abdulla Saif Al Nuaimi Chairman 2 14/2/20122/3/2012

18/4/201217/9/2012

12/11/2012

2 Abdulfatah Abdulsalam Enaami Member 4


4 Mohamed Badawy Al-Husseiny Member 1 *Mr. Khalid Mohamed Najibi whose term expired June 2012 attended 3 meetings of the NRGC in 2012

* Mr. Adel A. Aziz Al Jabr was a member of the NRGC till September 2012 and he attended 4 meetings in 2012

Board Investment Committee (BIC) Minimum BIC Meetings per year is 4 meetings


1 H.E. Khadem Abdulla Al Qubaisi Chairman 315/2/201228/3/201211/6/201218/9/2012

14/11/2012

2 Abdulfatah Abdulsalam Enaami Member 5

3 H.E. Abdulla Saif Al Nuaimi Member 2


5 Mohamed Badawy Al-Husseiny Member 3

Board Audit and Risk Committee (BARC) Minimum BARC Meetings per year is 4 meetings

No. Name Type of Membership 1 Meeting Held Date of Meeting

1 Mohammed Al Fahim Chairman 1

10/11/2012

2 Ebrahim Hussain Ebrahim Member 1

3 Adel A. Aziz Al Jabr Member 1


5 Khalid Jassim Bin Kalban Member 0 Note: Audit & Risk Committees were combined in one committee (BARC) in September 2012

SHARIA’A COMPLIANCEThe Bank has a dedicated Sharia’a department acting as the primary conduit of communication between the Bank and its Sharia’a Supervisory Board (SSB). The responsibilities of the Sharia’a department include the following:

• Ensuringprogrammesareinplaceforallapprovedproducts,withdetailedproceduressignedoffbyrelevantdepartments.

• EnsuringthereareFatwassupportingallapprovedproductsandthattheconcerneddepartmentsadheretothem.

• EnsuringthattheBankcomplieswithapplicableAAOIFIstandards,theSSB’sandotherapplicableSharia’aguidelinesandtheBank’s Sharia’a compliance manual.

• ConductingperiodicSharia’aaudits,discussingtheauditfindingswithmanagementandissuingcompliancereports.

• ReportingtotheCEOandSSBontheresultsoftheSharia’aauditsandthestatusofimplementationoftherecommendationsmadeby the Sharia’a Department.

• AssistingrelationshipmanagersandrelevantdepartmentsininterpretingSharia’aguidelines.

• CollatinginquiriesandquestionsfromBankdepartmentsandsubmittingthemtotheSSB.

• ArrangingandminutingSSBmeetings.


MANAGEMENT COMMITTEES

The Bank has established four Management Committees, both to support the Board committees in carrying out their duties and to ensure appropriate controls and processes are in place. They are the Executive Management Committee (EMC), the Management Risk Committee (MRC), the Asset and Liability Committee (ALCO) and the Human Resources Committee (HRC). The terms of reference of each committee are derived from the terms of reference of the corresponding Board committee. Management committees meet monthly and report to the Board quarterly or more frequently if required or requested.

1- Executive Management Committee (EMC)

The Executive Management Committee (EMC) focuses on the execution of the strategic business plan approved by the Board. The EMC has overall responsibility for the day-to-day management of the Bank, within the overall approved guidelines laid down by the Board. The responsibilities of the EMC include the following:

• RegularlyreviewtheenvironmentinwhichtheBankoperatesandreflectchangesthereinintheBank’sfuturedevelopment.

• Overseetheday-to-daydecisionmakingsothattheBankcanbeeffectivelymanaged.

• Harnessandenhancetheteamspiritbetweendepartmentstoimprovecoordination.

• Troubleshootandaddressissuesofconcern.

• Continuouslymonitorandreviewactivitiesofalldepartmentswiththeobjectiveofefficientresourceutilization.

• ReviewtheBank’sbusinessstrategyandannualoperatingplans(revenueandcost)andmonitorsprogresstowardstheir achievement, taking appropriate corrective action as necessary.

• EnsurecontinuityofmanagementsothatthedaytodayrunningoftheBankisunaffectedbytheabsenceofanyone/all Committee members.

• AvoidconcentrationsofdecisionmakingpowerintheBankbyinstallinganappropriatedelegationofauthoritiesforoperational decisions.

• PromoteconsistenceandcohesivenessintheBank’srelationshipswithallitsstakeholders.

• Trackindustrytrendsanddevelopments.

2- Management Risk Committee (MRC)

The principal role of the MRC is to assist the Board in the development, installation, and ongoing maintenance of an integrated enterprise risk management framework within FEB. The principal duties & responsibilities of the MRC include the following:

• FormulateandrecommendRiskStrategytotheBoardfortheirapproval

• DevelopandrecommendRiskPoliciestotheBoardfortheirapproval

• Reviewandapprovealltypesofcounterpartyexposures,including,butnotlimitedtocredittransactions,investments,Islamic financings, sukuks, placements etc.

• Exercisesthepowersspecificallydelegatedtoitwithcareanddiligence.

• Reviewallassumptionsofriskhowsoeveroriginated,(creditcounterparty,investment,operational,treasury)andapprove/reject or recommend the proposal to the relevant approving authorities depending on the approval authority level.

• DefineandsetriskparametersandbenchmarksthatareconsistentwiththeBank’sstrategicbusinessobjectivesandriskprofile;

• ProactivelyreviewtheBank’sriskprofileandensureitiswithintheriskparametersapprovedbytheBoard;

• ReviewtheBank’sprovisioningrequirementandcapitaladequacyandallocatecapitaltobusinessesasrequired.



3- Asset and Liability Committee (ALCO)ALCO’s principal responsibilities are to:

• Proposethenecessarypoliciesandprocedurestomanageliquidityandmarketrisk.

• Reviewandmonitorthebalancesheet(andoff-balancesheetpositions)oftheBank(includingtheimpactofitssubsidiaries)such that the Board’s liquidity and market risk policies are implemented.

• Ensurethatlinesofauthorityandaccountabilitywithintheliquidityandmarketriskmanagementprocessareclearlydelineated.

• OverseecontrolstomanagetheBank’smarketrisk.

• ProposestrategiestotheBoardinrespectofproprietaryinvestmentsandtheuseofderivatives.

• Ensurethatonaday-to-daybasistheBankcomplieswithapplicablelawsandregulations.

4- Human Resources Committee (HRC)The principal role of the HRC is to assists the Board’s NRGC by performing the following tasks:

• EnsuringtheBankhasaneffectiveorganizationalstructureandappropriatelystaffedatalltimestoachievethebusinessplanapproved by the Board.

• Monitorcompetitivehumanresourcesandcompensationpoliciesandpracticesandrecommendingchangesasappropriate.

• Ensuringappropriateprocessesareinplacefortheselection,evaluation,compensation,andsuccessionofstaffandseniormanagement.

• Evaluatingandrecommendingcompensationforthestaff.

• Evaluatingotherrelatedinitiativesasmaybenecessaryordesirabletoenhanceperformance.

• PerformsuchothertasksasdelegatedbytheNRGCfromtimetotime.

The duties & responsibilities of the (HRC) has the following specific responsibilities:

• AssisttheBoard’sNRGCinreviewingannuallytheBank’sorganizationalstructure,compensationphilosophy,performancemanagement system and compensation guidelines, and human resources policies, and recommend to the Board any necessary changes.

• Reviewtheannualadjustmentstocompensationproposedbymanagementand,ifsatisfied,recommendapprovaltotheBoard.

• Developingcriteriatobemetbyprospectivecandidates,andabroadcompetitivesearchprocess

• ReviewingandassessingqualificationsofcandidatesandrecommendingacandidatetotheNRGC

• ReviewManagement’sproposalsfortheappointmentofexecutivesandseniormanagers.

• Reviewthemanagement’ssuccessionanddevelopmentplansfortheexecutivesandseniormanagersandtrainingplanforallBankstaff.


FEB shareholders List ( Table 2)

No. Name Nationality NO. of SharesNominal

Value (USD)Percentage of

Capital

1 Tasameem Real Estate Co. LLC UAE 218,503,834 218,503,834 21.85 %

2 Libyan Investment Authority (Government of Libya) Libya 162,500,000 162,500,000 16.25 %

3Abu Dhabi Water and Electricity Authority(Government of Abu Dhabi)

UAE 150,000,000 150,000,000 15 %

4 Emirates Islamic Bank PSJC UAE 100,000,000 100,000,000 10 %

5 Mohamed Bin Hussain Ali Al Amoudi Saudi Arabia 50,000,000 50,000,000 5 %

6 Al Jabr Trading Co. Saudi Arabia 50,000,000 50,000,000 5 %

7 Ithmaar Development Co. Ltd Cayman Island 45,000,000 45,000,000 4.50 %

8 Capital Management House B.S.C. (c) Bahrain 39,401,857 39,401,857 3.94 %

9 Dubai Investment PJSC UAE 35,000,000 35,000,000 3.50 %

10 Omar Ibn Abdullah Ibn Hassan Bahassan Saudi Arabia 20,000,000 20,000,000 2.00 %

11Awqaf and Minors Affairs Foundations(Dubai Government)

UAE 20,000,000 20,000,000 2.00 %

12 Al Taif Investment L.L.C. UAE 15,000,000 15,000,000 1.50 %

13 Taqa Investment Company Ltd 12,621,379 12,621,379 1.26 %

14General Pension and Social Security Authority (Government of the United Arab Emirates)

UAE 12,500,000 12,500,000 1.25 %

15 RAK Properties PJSC UAE 12,500,000 12,500,000 1.25 %

16 Khaleeji Commercial Bank B.S.C. Bahrain 10,000,000 10,000,000 1.00 %

17 Bahrain Islamic Bank B.S.C. Bahrain 10,000,000 10,000,000 1.00 %

18 Sultan Group Investment L.L.C. UAE 10,000,000 10,000,000 1.00 %

19 Sharhaj Islamic Bank UAE 10,000,000 10,000,000 1.00 %

20 Abdul Razak Mohammed Qanbar Al Ansari Holding Company L.L.C. Saudi Arabia 6,670,000 6,670,000 0.67 %

21 Nahar Investment Co. W.L.L. Bahrain 5,302,930 5,302,930 0.53 %

22 Sheikh Mohammed Bin Faisal Bin Thani Al Thani Qatar 5,000,000 5,000,000 0.50 %

Total 1,000,000,000 1,000,000,000 100 %



CORPORATE GOVERNANCE AND TRANSPARENCY DISCLOSURES:

a) Board Structure & Basic Organizational Chart:

I. Board StructureRefer to (Table 1) Page 28/29.

II. Basic Organizational Chart Refer to Chart Page 26.

III. Independent Board members The Board of FEB has the following 4 independent Directors as follows: 1- Mr. Mohamed Ali Al Fahim. 2- Mr. Mohamed Badawy Al-Husseiny. 3- Mr. Ebrahim Hussain Ebrahim. 4- Mr. Abdulfatah Abdulsalam Enaami.

b) Bios of Board Members and Senior Management: Refer to the Board Bio’s Page 4 and to the Senior Management Bio’s Page 12.

c) Information on the managerial structure:

I. Committees Refer to Page 28/29.

II. Segregation of duties: Detailed job descriptions that ensure proper segregation of duties are in place for each role. Also, all critical positions (approved persons) are approved by the CBB as required.

III. Reporting lines All senior management members reports to either ACEO or appropriate Board Committees.

IV. Responsibilities: As defined in each job description.

d) Performance-linked incentive structure: FEB had no performance-linked incentive structure during 2012.

e) Nature and extent of transactions with related parties: Covered under Note 24 of the consolidated financial statements.

f) Approval process for related party transactions:Approval process for related party transaction is exactly the same as the approval process for unrelated party transactions as they are treated on arm’s length basis and there is no exceptional treatment/process for approving such transactions.Refer to Note (o) below.


g) Changes in the structures from prior periods:

Board’s Committees:

- Investment Committee:

Was in 2011 2012

H. E. Khadem Abdulla Al Qubaisi H. E. Khadem Abdulla Al Qubaisi

H. E. Hamad Rashid Al Neaimi * Abdulfatah Abdulsalam Enaami

Abdulfatah Abdulsalam Enaami H. E. Abdulla Saif Al Nuaimi

Abdulla Abdulkarim Showaiter Abdulla Abdulkarim Showaiter

H. E. Abdulla Saif Al Nuaimi Mohamed Badawy Al-Husseiny *

*H.E. Hamad Rashid Al Neaimi up to February 2012 *Mr. Mohamed Badawi Al-Husseiny from May 2012

- NRGC Committee:

Was in 2011 2012

H. E. Khadem Abdulla Al Qubaisi H. E. Abdulla Saif Al Nuaimi

H. E. Hamad Rashid Al Neaimi * Abdulfatah Abdulsalam Enaami

Abdulla Abdulkarim Showaiter Abdulla Abdulkarim Showaiter

Khalid Mohamed Najibi * Mohamed Badawy Al-Husseiny *

Adel A. Aziz Al Jabr

*H.E. Hamad Rashid Al Neaimi up to February 2012. *Mr. Mohamed Badawi Al-Husseiny from May 2012. *Mr. Khalid Mohamed Najibi up to June 2012.

- Audit Committee:

Was in 2011 2012 Remarks

Ebrahim Hussain Ebrahim Ebrahim Hussain Ebrahim During September 2012 Audit Committee combined with Risk Committee under one Committee called Audit & Risk Committee (BARC)

Khalid Jassim Bin Kalban Khalid Jassim Bin Kalban

Mohamed Ali Al Fahim Mohamed Ali Al Fahim

- Risk Committee:

Was in 2011 2012 Remarks

Khalid Mohamed Najibi Khalid Mohamed Najibi * During September 2012 Risk Committee combined with Audit Committee under one Committee called Audit & Risk Committee (BARC)

Adel A. Aziz Al Jabr Adel A. Aziz Al Jabr

Sadoun Barghash Al Sadoun Sadoun Barghash Al Sadoun

*Mr. Khalid Mohamed Najibi up to June 2012.

h) Communications strategy:The Bank has a public disclosure policy approved by the Board of Directors. The Bank communicates with its customers and stakeholders in a timely manner 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. The annual report includes all the notes for the current financial year and a minimum of three preceding financial years are provided on the Bank’s website. Product details are also disseminated to customers and other interested parties through prospectuses, brochures and/or periodic investment updates.

i) Distribution of ownership of shares by nationality:Refer to FEB shareholders list (Table 2) Page 32.



j) Directors’ and senior managers’ trading of the Bank’s shares during the year, on an individual basis: There was no such trading.

k) Distribution of ownership of shares by Directors and senior managers, on an individual basis:Directors and senior managers do not own any shares in the Bank.

l) Distribution of ownership of shares by size of shareholder: Refer to FEB Shareholders List (Table 2) Page 32.

m) Ownership of shares by government: The following government entities hold shares in the Bank:

- Libyan Investment Authority - Government of Libya.- Abu Dhabi Water & Electricity Authority – Government of Abu Dhabi.- Awqaf and Miners Affairs Foundation – Government of Dubai.- General Pension & Social Security Authority - Government of UAE.

n) The Board’s functions: - The Board aims to perpetuate a successful business and optimizing long term financial returns. - The Board is responsible for establishing the Bank’s policies and strategy and for regularly monitoring the effectiveness of executive management in carrying out those policies and strategies.

o) The types of material transactions that require Board approval: The Board has delegated certain approval authorities to the Management Risk Committee (MRC) and Board Investment Committee (BIC). These approval authorities are risk sensitive i.e. the higher the risk, the lower the approval authority amount. For the (MRC) the maximum approval amounts range from US$10MM to US$25MM, and for the (BIC) the maximum approval amounts range from US$30MM to US$70MM depending on the internal rating of the obligor. Any amount exceeding the BIC approval authority limit has to be approved by the Board.

p) Number and names of independent Board members: Refer to Note (a) - (III) Page 33.

q) Board terms and start date for each term for each Directors: Started June 2011 – ends June 2014.

r) What the Board does to induct, educate and orient new Directors:The Board arranges induction sessions to new Directors to educate them about their responsibilities, the business of the Bank, the regulator’s rules and regulations and introducing them to management as well. Further, appointment letters are issued by the Board to all new Directors which clearly state the rights, duties and expectations from new Directors. New Directors are given copies of the Directors Handbook as well for further information on the responsibilities of the Board and its committees.

s) Election system of Directors and any termination arrangements: Directors are elected by the Shareholders General Meeting in accordance with the Bank’s Memorandum & Articles and the Commercial Companies Law.

t) Meeting dates (number of meetings during the year):Refer to the Board and Sub-Committees Meetings ( Table1) Page 28/29.

u) Attendance of Directors at each meeting:Refer to the Board and Sub-Committees Meetings ( Table1) Page 28/29.


v) The Board’s code of ethical business conduct, and how the Board monitors compliance:

The Directors have adopted and will adhere to the following code of conduct:

1.1 To act with honesty, integrity and in good faith, with due diligence and care, with a view to the best interest of the Bank and its

shareholders and other stakeholders.

1.2 To act only within the scope of their responsibilities and not participate in the day-to-day management of the Bank.

1.3 To have a proper understanding of, and competence to deal with the affairs and products of the Bank and devote sufficient

time to their responsibilities.

1.4 To safeguard the confidentiality of Board discussions and deliberations.

1.5 Not to make improper use of information gained through the position as a Director or take improper advantage of the position

of Director.

1.6 To make informed decisions with sufficient detailed knowledge of the Bank’s business and performance.

1.7 To independently assess and question the policies, processes and procedures of the Bank , with the intent to identify and

initiate management action on issues requiring improvement.

1.8 Not to agree to the Bank incurring an obligation unless he/she believes at the time, on reasonable grounds, that the Bank

will be able to perform the obligations when it is required to do so.

1.9 Not to agree to the business of the Bank being carried out or cause or allow the business to be carried out, in a manner likely to

harm the Bank’s creditors.

1.10 To deal fairly and show respect to all of the Bank’s employees and customers.

1.11 Not enter into competition with the Bank.

1.12 Not demand or accept substantial gifts from the Bank for himself/herself or his/her associates.

1.13 Not misuse the Bank’s assets.

1.14 Not take advantage of business opportunities to which the Bank is entitled for himself/herself or his/her associates.

1.15 Disclose to the Board any potential conflicts of interest.

1.16 Excuse themselves from any discussions or decision-making that involve a subject in which they are incapable of providing

objective advice or which involves a real or potential conflict of interest.

The Directors’ observance of the code of conduct will be regularly reviewed by The Board Audit & Risk Committee.

w) Minimum number of Board committee meetings per year, the actual number of Board meetings, attendance of committees’

members and the work of committees and any significant issues arising during the period:

- Refer to the Board and Sub-Committees Meetings ( Table1) Page 28/29.

- No significant issues arose.

x) Reference to Module HC and any amendments subsequently made by the CBB:

Bahrain’s Ministry of Industry and Commerce issued a Corporate Governance Code (CGC), effective from 1 January 2011, with a view

to establishing best-practice corporate governance principles in Bahrain and providing protection for investors and other company

stakeholders through compliance with those principles. All public joint stock companies incorporated under the Bahrain Commercial

Companies Law had to be in full compliance by the end of 2011. In October 2010 the CBB updated the corporate governance provisions

of Module HC of the CBB Rulebook to align them with the new Code, and banks were required to be fully compliant with Module HC

by 31 December 2011. The CBB issued further updates to the Module in January, April and October 2011. In common with other CBB

Rulebook Modules, Module HC contains a mixture of Rules (with which compliance is mandatory) and Guidance (with which the Bank

is expected to comply or to explain its noncompliance). FEB has substantially implemented both Rules and Guidance in their entirety. As

per HC-1.3.7A of CBB Rulebook, at least half the Board meetings in any twelve-month period are held in the Kingdom of Bahrain.



y) Review of internal control processes and procedures:

The Board of Directors’ responsibilities are to:

- Review and evaluate the effectiveness of and/or weaknesses in the Bank’s internal controls, the overall control environment,

accounting and financial controls.

- Ensure that the Bank’s operations, individually and collectively are measured, monitored and controlled by appropriate effective and

prudent risk management systems that are commensurate with the scope of the Bank’s activities.

- Receive and discuss reports from management on an annual /periodic basis relating to compliance at the Bank (including anti-money

laundering and regulatory compliance).

In fulfilling its responsibilities, the Board has established appropriate number of sub-committees with members having sufficient

experience to enable them performing their functions effectively. The Board receive, review and discuss periodic reports from the

management, internal / external auditors which assess effectiveness of the Bank ’s internal control framework.

z) Directors responsibility with regard to the preparation of financial statements:

The Board of Directors, through its Board Audit & Risk Committee periodic meetings, has the following responsibilities in respect of the financial

statements:

- Review and discuss with the Bank’s management and external auditors the overall financial statements and assess any possible

improprieties in financial reporting or other matters.

- Assess whether the Bank has followed appropriate accounting policies and made appropriate estimates and judgments, taking into

account the views of the external auditors.

- Receive a written statement from the Bank’s Acting CEO and the Head of Financial Control that the Bank’s interim and annual

financial statements present a true and fair view, in all material respects, of the Bank’s financial condition and results of operations in

accordance with applicable accounting standards.

aa) Assessment of Board of Directors & Committees:

The Board, its Committees and individual Directors are annually assessed by the Board with respect to their effectiveness and contribution.

bb) Website and Communication with Shareholders:

Refer to the Communications Strategy Note (h) Page 34.

cc) Investor / consumer awareness programs for information on new products and services:

Progress Reports sent by Investment Department to Investors.

dd) Mediation and advice bureaus for investors and customers set up by the Bank , including clearly written procedures for logging

of complaints:

FEB has appointed a Customer Complaints Officer who is acting as per the approved Customer Complaints Mannual. His contact details

are available on the website of the Bank.

ee) Social functions and charitable contributions of the Bank :

Refer to note 30 of the consolidated financial statements.

ff) Governance arrangements, systems and controls employed by the Bank to ensure Sharia’a compliance:

Refer to Sharia’a Section Page 29.


gg) Non-Sharia’a-compliant earnings and expenditure and the manner in which they are disposed of:

The non-Sharia’a-complaint earnings and expenditure converted, by a decision of the Sharia’a Board of the Bank to a charity account.

hh) The annual zakah contributions of the Bank , where relevant:

Zakah is the responsibility of individual shareholders. However, it is paid by the Bank on behalf of the shareholders based on retained

earnings and other reserve balances at the end of the year with the payment of Zakah on share capital being the responsibility of the

Bank’s shareholders. For details of contributions, please refer to the statement of sources and uses of Zakah and Charity fund as well as

note 25 within the consolidated financial statements.

ii) Aggregate remuneration paid to board members:

Refer to note 24 of the consolidated financial statements.

jj) Remuneration policy of the Bank for Board members and senior management:

Remuneration of senior management as well as for all staff is reviewed by the Nomination, Remuneration, & Governance Committee

and approved by the Board. With regards to Board members, there is no policy as such, but the Nomination Committee does review

their remuneration, if any, and submits their recommendation to the Board as per market practice.

kk) Aggregate remuneration paid to senior management.

Details are as per note 24 of the consolidated financial statements.

OTHER DISCLOSURES:

a) Names of shareholders owning 5% or more:

Refer to FEB Shareholders List ( Table 2) Page 32.

The Bank is not aware that any shareholders owning 5% or more act in concert or of any voting, shareholders’ or other agreements

among them.

b) Directorships held by the Directors on other Boards:

Refer to The Board Bio’s Page 4.

c) Director’s trading of the Bank’s shares during the year:

There was no such trading

d) Audit fees charged by the external auditor:

Audit fees: BD 18,375

e) Non-audit services provided by external auditors:

Review of Reporting: BD 24,700

Other Consultations: BD 1,575

f) Reasons for any switching of auditor and reappointing of auditor; and

Auditors were reappointed by the AGM for the new financial year.



g) Conflict of interest :

The Directors Handbook issued to all Directors on joining the Board contains a detailed section on conflicts of interest describing the

steps the Board takes to ensure Directors exercise independent judgment in considering transactions and agreements in respect of which

a Director or executive officer has a material interest. The Handbook stresses that:

• TheBoardanditsmembersmustactwithhonesty,integrityandingoodfaith,withduediligenceandcare,withaviewtothebest

interest of the Bank and its shareholders and other stakeholders.

• EachDirectormustconsiderhimselfasrepresentingallshareholdersandmustactaccordingly.

• DirectorsmustactethicallyatalltimesandinaccordancewiththeCodeofConductandtheConflictofInterestpolicy.

• IfanactualorpotentialconflictofinterestarisesinrespectofaDirector,theDirectormustpromptlydisclosesuchconflicttotheBoard.

• EachDirectormustmakeeverypracticableefforttoarrangehispersonalandbusinessaffairstoavoidaconflictofinterestwiththeBank.

• ADirectormustabsenthimselffromanydiscussionordecision-makingthatinvolvesasubjectwhereheisincapableofproviding

objective advice, or which involves a subject, transaction or proposed transaction where there is a potential conflict of interest.

• TheSecretaryshallascertain,atthebeginningofeachBoardcommitteemeeting,theexistenceofanyconflictsofinterestand

minute them accordingly.

• NoconflictofinterestwasreportedbyanyDirectorduring2012.

h) Details of penalties paid:

During 2012, FEB has paid penalty of BHD 10,400 to the Central Bank of Bahrain for late filing of one of its subsidiary’s audited financial

statements for the year ended 31 December 2011.



FINANCIAL STATEMENTS


INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERS

We have audited the accompanying consolidated statement of financial position of First Energy Bank B.S.C. (c) (“the Bank”) and its

subsidiaries (“the Group”) as of 31 December 2012, and the related consolidated statements of income, cash flows, changes in owners’

equity and sources and uses of zakah and charity fund for the year then ended. These consolidated financial statements and the Group’s

undertaking to operate in accordance with Islamic Shari’a Rules and Principles are the responsibility of the Group’s Board of Directors.

Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with Auditing Standards for Islamic Financial Institutions issued by the Accounting and Auditing

Organisation for Islamic Financial Institutions (“AAOIFI”). Those standards require that we plan and perform the audit to obtain

reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes

examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also

includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall

consolidated financial statements presentation. We believe that our audit provides a reasonable basis for our opinion.

OPINION

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Group as of 31

December 2012, the results of its operations, its cash flows and changes in owners’ equity for the year then ended in accordance with

Financial Accounting Standards issued by AAOIFI.

Other Matters

As required by the Bahrain Commercial Companies Law and the Central Bank of Bahrain (CBB) Rule Book (Volume 2), we report that:

a) the Bank has maintained proper accounting records and the consolidated financial statements are in agreement therewith; and

b) the financial information contained in the report of the Board of Directors is consistent.

We are not aware of any violations of the Bahrain Commercial Companies Law, the Central Bank of Bahrain and Financial Institutions

Law, the CBB Rule Book (Volume 2 and applicable provisions of Volume 6) and CBB directives or the terms of the Bank’s memorandum

and articles of association having occurred during the year ended 31 December 2012 that might have had a material adverse effect

on the business of the Bank or on its financial position. Satisfactory explanations and information have been provided to us by

management in response to all our requests. The Bank has also complied with the Islamic Shari’a Rules and Principles as determined by

the Shari’a Supervisory Board of the Group.

FIRST ENERGY BANK B.S.C. (c) Manama, Kingdom of Bahrain 26 February 2013


IN COMPLIANCE WITH THE TERMS OF OUR LETTER OF APPOINTMENT, WE ARE REQUIRED TO REPORT AS FOLLOWS

The Sharia’a Supervisory Board (“SSB”) has reviewed the principles and contracts relating to the transactions conducted by First Energy Bank (the “Bank”) during the course of the year ending December 31, 2012 their review was conducted in order to judge whether the Bank followed the principles of the Islamic Sharia’a, specific fatwas, and guidelines issued by the SSB. The SSB has also reviewed and approved the internal periodic Sharia’a reports issued by the Bank’s Head of Sharia’a compliance with SSB rulings.

The SSB responsibility is to present an independent view of the Bank’s operations and to communicate it to the shareholders.

The review was planned and performed so as to obtain all necessary information and explanations to provide sufficient evidence proving that the Bank has not violated any rules and principles of the Islamic Sharia’a.

IN OUR OPINION

• TheBank’scontracts,transactionsanddealsfortheyearendingDecember31,2012areincompliancewiththerulesandprinciplesof the Islamic Sharia’a.

• TheBank’sallocationofprofitandchargingoflossesrelatingtoinvestmentaccountsareincompliancewiththerulesandprinciplesof the Islamic Sharia’a.

• Earningsthathavebeenrealizedfromsourcesthatarenon-Sharia’acompliantweredonatedtocharity.

• TheBank’scalculationofZakatisincompliancewiththerulesandprinciplesoftheIslamicSharia’a.

We beseech the Almighty to grant us excellence and success.

Wassalam Alaikum Wa Rahmat Allah Wa Barakatuh.

Sheikh Nizam Mohammed Saleh Yaqubi Sheikh Dr. Mohamed Ali bin Ibrahim Elgari Sheikh Dr. Osama Mohamed Bahar

Chairman - Sharia’a Supervisory Board Member - Sharia’a Supervisory Board Member - Sharia’a Supervisory Board

SHARIA’A SUPERVISORY BOARD REPORT


Notes 2012 2011

ASSETS

Cash and bank balances 3 15,654 3,019 Due from financial institutions 4 158,403 425,848 Financing receivables 5 - 317,008 Investment in ijarah assets 6 529,363 - Investment securities 7 497,387 328,826 Investment in associates 8 101,049 92,116 Other assets 9 89,263 52,791 Property and equipment 10 9,345 11,089

TOTAL ASSETS 1,400,464 1,230,697

LIABILITIES AND OWNERS’ EQUITY

LiabilitiesDue to financial institutions 11 59,612 89,527 Murabaha payable 12 54,081 - Term financing 13 68,200 - Other liabilities 14 58,992 98,468

Total liabilities 240,885 187,995

Owners’ equity

Equity attributable to shareholders of the parent 15Share capital 1,000,000 1,000,000 Statutory reserve 4,784 1,800 Foreign exchange translation reserve (2,170) (2,170)Retained earnings 32,104 5,481

Total equity attributable to shareholders of the parent 1,034,718 1,005,111

Non-controlling interest 16 124,861 37,591

Total owners’ equity 1,159,579 1,042,702 TOTAL LIABILITIES AND OWNERS’ EQUITY 1,400,464 1,230,697

COMMITMENTS 27 77,968 85,296

The consolidated financial statements, which consist of pages 44 to 77, were approved by the Board of Directors on 26 February 2013 and signed on its behalf by:

H.E. Khadem Al Qubaisi Mohammed Al Fahim Mohammad Ghanem

Chairman Board Member Acting Chief Executive Officer

CONSOLIDATED STATEMENT OF FINANCIAL POSITION At 31 December 2012 US$ 000’s

The attached notes 1 to 31 form part of these consolidated financial statements. The attached notes 1 to 31 form part of these consolidated financial statements.


CONSOLIDATED STATEMENT OF INCOMEFor the year ended 31 December 2012 US$ 000’s

Notes 2012 2011

INCOME

Profit from Islamic finances 17 5,090 16,707 Profit on Islamic finances (644) (772)

Net income from Islamic finances 4,446 15,935

Rental income from investment in ijarah assets 33,084 -

Financing cost relating to term financing obtained to purchase ijarah assets 13 (2,506) -

Profit on Islamic financing against investment in ijarah assets (1,053) -

Net income on investment in ijarah assets 29,525 -

Income from investments 18 17,259 7,249 Share of results of associates 8 (7,067) 831 Profit on subordinated loan 19 10,657 - Gain arising on conversion of

associate to subsidiary 8 21,759 - Other income 596 1,478

Total income 77,175 25,493

EXPENSES

Staff costs 20 10,656 10,637 Investment banking expenses 854 941 Depreciation and amortisation 21 9,538 2,845 Other expenses 22 15,026 6,266

Total expenses 36,074 20,689

NET INCOME FOR THE YEAR BEFORE PROVISION FOR IMPAIRMENT 41,101 4,804

Provision for impairment 23 (4,077) (1,260)

NET INCOME FOR THE YEAR 37,024 3,544

Attributable to:Shareholders of the parent 29,838 3,630 Non-controlling interest 7,186 (86)

37,024 3,544



CONSOLIDATED STATEMENT OF CASH FLOWSFor the year ended 31 December 2012 US$ 000’s

Notes 2012 2011

OPERATING ACTIVITIESNet income for the year 37,024 3,544 Adjustments for :

Depreciation and amortisation 9,538 2,845 Amortisation of premium 2,756 (1,783)Fair valuation loss on equity option 1,386 1,959 Provision for impairment 4,077 1,260 Share of results of associates 7,067 (831)Gain arising on conversion of associate to subsidiary (21,759) - Gain on sale of investments (5,794) (1,320)

Operating profit before changes in operating assets and liabilities 34,295 5,674

Net changes in operating assets and liabilities:Financing receivables 317,008 (49,826)Due from financial institutions 26,219 33,168 Other assets (40,800) (4,513)Due to financial institutions (29,915) (59,285)Other liabilities (43,577) 86,661 Payment to charities (207) (177)

Net cash from operating activities 263,023 11,702

INVESTING ACTIVITIESPurchase of investments (345,113) (195,646)Disposal/ maturity of investments 182,485 80,400 Net changes in investment in associates (16,000) 6,057 Investment in ijarah assets (515,063) - Purchase of premises and equipment (104) (32)Purchase of software (184) (92)

Net cash used in investing activities (693,979) (109,313)

FINANCING ACTIVITIESNet changes in non-controlling interest 16 80,084 78 Murabaha payable 54,081 - Term financing 68,200 -

Net cash from financing activities 202,365 78

NET DECREASE IN CASH AND CASH EQUIVALENTS (228,591) (97,533)

Cash and cash equivalents at 1 January 398,442 495,975

CASH AND CASH EQUIVALENTS AT 31 DECEMBER 169,851 398,442

For the purpose of the cash flows statement, cash and cash equivalents comprise of the following:

Cash and bank balances 15,654 3,019 Due from financial institutions with original maturity of 90 days or less (Note 4) 154,197 395,423

169,851 398,442



CONSOLIDATED STATEMENT OF CHANGES IN OWNERS’ EQUITYFor the year ended 31 December 2012 US$ 000’s

Equity attributable to shareholders of the parent

NoteShare

capitalStatutory

reserve

Foreignexchange

translationreserve

Retainedearnings Total

Non-controlling

interest

Total owners’

equity

Balance at 1 January 2012 1,000,000 1,800 (2,170) 5,481 1,005,111 37,591 1,042,702

Movement in non-controlling interest

16 - - - - - 80,115 80,115

Dividends of subsidiary - - - - - (31) (31)

Net income for the year - - - 29,838 29,838 7,186 37,024

Transfer to statutory reserve - 2,984 - (2,984) - - -

Transfer to zakah and charity fund - - - (231) (231) - (231)

Balance at 31 December 2012 1,000,000 4,784 (2,170) 32,104 1,034,718 124,861 1,159,579

Balance at 1 January 2011 1,000,000 1,437 (2,170) 2,252 1,001,519 37,599 1,039,118

Movement in non-controlling interest

- - - - - 78 78

Net income (loss) for the year - - - 3,630 3,630 (86) 3,544

Transfer to statutory reserve - 363 - (363) - - -

Transfer to zakah and charity fund - - - (38) (38) - (38)

Balance at 31 December 2011 1,000,000 1,800 (2,170) 5,481 1,005,111 37,591 1,042,702



CONSOLIDATED STATEMENT OF SOURCES AND USES OF ZAKAH AND CHARITY FUNDFor the year ended 31 December 2012 US$ 000’s

Notes 2012 2011

Sources of zakah and charity funds

Undistributed zakah and charity funds at the beginning of the year 1 140

Contributions by the Bank 231 38

Total sources of zakah and charity funds during the year 232 178

Uses of zakah and charity fund

Contributions for charitable purposes 207 177

Total uses of funds during the year 207 177

Undistributed zakah and charity fund at 31 December 14 25 1



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012 US$ 000’s

1 INCORPORATION AND ACTIVITIES

First Energy Bank B.S.C. (c) (the “Bank”) is a closed shareholding company incorporated in the Kingdom of Bahrain on 23 June 2008, under Commercial Registration No. 69089. The Bank operates under an Islamic Wholesale Banking license issued by the Central Bank of Bahrain (the “CBB”). The Bank’s registered office is at Building 1398, Road 4626, Block 346, Manama, Kingdom of Bahrain. The principal activities of the Bank and its subsidiaries (the “Group”) include Shari’a compliant investment advisory services, participation in project development, joint ventures, mergers and acquisitions and the purchase of assets and asset portfolios primarily related to the energy sector. The Bank is regulated by the CBB and supervised by a Shari’a Supervisory Board for compliance with Shari’a rules and principles. The consolidated financial statements were authorised for issue by the Board of Directors on 26 February 2013.

2 ACCOUNTING POLICIES

2.1 Basis of preparationThe consolidated financial statements have been prepared on a historical cost basis, except for derivative financial instruments and equity-type instruments through equity that have been measured at their fair value. The consolidated financial statements are presented in United States Dollars (US$) being the reporting and functional currency of the Bank. All values are rounded to the nearest US Dollar thousands (US$ ‘000) unless otherwise indicated. Statement of ComplianceThe consolidated financial statements are prepared in accordance with the Financial Accounting Standards (FAS) issued by the Accounting and Auditing Organisation for Islamic Financial Institutions (“AAOIFI”), the Shari’a Rules and Principles as determined by the Shari’a Supervisory Board of the Group, the Bahrain Commercial Companies Law, the Central Bank of Bahrain and Financial Institutions Law, and the CBB regulations (as contained in Volume 2 of the CBB rulebook) and directives. In accordance with the requirements of AAOIFI, for matters which are not covered by the AAOIFI standards, the Group uses the relevant International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (“the IASB”).

Basis of consolidationThe consolidated financial statements comprise the financial statements of the Bank and its subsidiaries as at and for the year ended 31 December each year. The financial statements of the subsidiaries are prepared for the same reporting year as the Bank, using consistent accounting policies. All intra-group balances, transactions, income and expenses and profits and losses resulting from intra-group transactions are eliminated in full. Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date that control ceases. Control is achieved where the Group has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Non-controlling interest in a subsidiary’s net assets is reported as a separate item in the Group’s owners’ equity. In the consolidated statement of income, non-controlling interest is included in net profit, and shown separately from that of the shareholders. Non-controlling interests consist of the amount of those interests at the date of the original business combination and the non-controlling interests’ share of changes in owners’ equity since the date of combination. Losses applicable to the non-controlling interest in excess of the non-controlling interest in a subsidiary’s owners’ equity are allocated against the interests of the Group except to the extent that the non-controlling interest has a binding obligation and is able to make an additional investment to cover the losses.

Transactions with non-controlling interests are handled in the same way as transactions with external parties. Sale of participations to non-controlling interests result in a gain or loss that is recognised in the consolidated statement of income. Changes in the ownership interest in a subsidiary that do not result in a loss of control are accounted for as an owners’ equity transaction.




2 ACCOUNTING POLICIES (continued)

The following are the principal subsidiaries of the Bank, which are consolidated in these consolidated financial statements:

Name of subsidiary Equity interest Nature of business

North Africa Investment Company, Cayman Islands 100% To hold the Group’s 40% associate stake in Arab Drilling and Workover Company, Libya.

First Energy-Oman, Cayman Islands 100% To hold 15% direct interest in Al Izz Islamic Bank in Oman.

FEB-Novus Aircraft Holding Company, Bahamas 98.5% To purchase and lease one A330-300 aircraft to Malaysian Airlines System.

Cosmos Industrial Investment Corporation B.S.C. (c), Bahrain *

93% Holding company for investment in a project for development and operation of a polycrystalline silicon plant in the Kingdom of Saudi Arabia.

MENAdrill Investment Company ** 59.44% Development and lease of jack up oil rigs

Al Dur Energy Investment Company, Cayman Islands 59% To hold 15% indirect interest in a power and water plant project in the Kingdom of Bahrain.

* This subsidiary is consolidated based on unaudited 30 September 2012 management accounts. ** This subsidiary is consolidated based on 30 November 2012 unaudited accounts reviewed by the respective subsidiary’s auditors.

2.2 Summary of significant accounting policies The significant accounting policies adopted in the preparation of the consolidated financial statements are set out below: a. Cash and cash equivalents Cash and cash equivalents as referred to in the consolidated statement of cash flows comprise cash and balances with banks and amounts due from financial institutions with original maturities of 90 days or less.

b. Due from financial institutions These comprise international commodity murabaha and wakala contracts, which are trade transaction agreements stated net of deferred profit and provision for impairment. c. Due to financial institutions These comprise funds received from financial institutions under the principles of murabaha and wakala contracts and are stated at the fair value of the consideration received less amounts settled. d. Financing receivables These comprise deferred sales transactions (murabaha), which are stated net of deferred profits and provision for impairment. e. Investment in ijarah assets Investments in ijarah assets are stated at cost less accumulated depreciation and accumulated impairment / provision. Changes in the expected useful life are accounted for by changing the depreciation period or method, as appropriate, and treated as changes in accounting estimates.




Depreciation is calculated using the straight-line method to write down the cost of ijarah assets to their residual values over their useful life.

Ijarah assets are derecognised on disposal or when no future economic benefits are expected from their use. Any gain or loss arising on derecognition of the ijarah asset (calculated as the difference between the net disposal proceeds and the carrying amount of the ijarah asset) is recognised in the consolidated statement of income in the year the asset is derecognised.

f. Investment securities These are classified as either equity type instruments carried at fair value through equity or debt type instruments carried at amortized cost. Initial recognition All investments are recognised on the acquisition date and are recognised initially at their fair value plus transaction costs. Equity-type instruments at fair value through equity Subsequent to acquisition, these are re-measured at fair value with unrealised gains or losses recognised in owners’ equity until the investment is derecognised or determined to be impaired at which time the cumulative gain or loss previously recorded in owners’ equity is recognised in the consolidated statement of income. Instruments which do not have a quoted market price or other appropriate methods from which to derive reliable fair values are stated at cost less impairment allowances. Debt-type instruments at amortised cost These instruments are managed on a contractual yield basis and are not held for trading and have not been designated at fair value through statement of income. Such investments are carried at amortised cost, less provision for impairment in value. Amortised cost is calculated by taking into account any premium or discount on acquisition. Any gain or loss on such investments is recognised in the consolidated statement of income, when the investment is de-recognised or impaired. g. Investment in associates The Group’s investment in its associates is accounted for under the equity method of accounting. An associate is an entity in which the Group has significant influence and which is neither a subsidiary nor a joint venture. Under the equity method, the investment in the associate is carried in the consolidated statement of financial position at cost plus post-acquisition changes in the Group’s share of net assets of the associate. Goodwill relating to an associate is included in the carrying amount of the investment and is not amortised. The consolidated statement of income reflects the Group’s share of the results of operations of the associate. If the Group’s share of losses exceeds its interest in an associate, the Group’s carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the associate. Profits and losses resulting from transactions between the Group and the associate are eliminated to the extent of the interest in the associate. h. Risk management instruments and hedge accounting The Group currently only enters into shari’a compliant risk management instruments to cover its exposure to profit rate risks. These derivative-type risk management instruments are initially recognised at fair value on the date on which a contract is entered into and are subsequently re-measured at their fair value. The fair value of an instrument is the equivalent of the unrealised gain or loss from marking to market the instrument using prevailing market rates. Instruments with positive market values (unrealised gains) are disclosed under other assets and instruments with negative market values (unrealised losses) are disclosed under other liabilities in the consolidated statement of financial position. Changes in the fair value of these financial instruments that are designated, and qualify as fair value hedges, are included in the income statement together with the corresponding change in the fair value of the hedged asset or liability that is attributable to the risk being hedged. Unrealised gains or losses on hedged assets which are attributable to the hedged risk are adjusted against the carrying values of the hedged assets or liabilities. For risk management instruments that are not designated in a qualifying hedge relationship, all changes in fair value are recognised immediately in the consolidated statement of income.





If the hedging risk management instrument expires or is sold, terminated, or exercised, or the hedge no longer meets the criteria for fair value hedge accounting, or the hedge designation is revoked, hedge accounting is discontinued prospectively. Any adjustment up to that point to a hedged item for which the effective profit method is used, is amortised to profit or loss as part of the recalculated effective profit rate of the item over its remaining life. Embedded derivatives Certain derivatives embedded in other financial instruments, such as the conversion option in a debt instrument, are treated as separate derivatives when their economic characteristics and risks are not closely related to those of the host contract and the host contract is not carried at fair value through statement of income. These embedded derivatives are separately accounted for at fair value, with changes in fair value recognised in the consolidated statement of income unless the Group chooses to designate the hybrid contracts at fair value through statement of income. The Group uses internal models to measure the fair value of embedded derivatives. These models use techniques generally recognised as standard within the industry. Some of the inputs to these models may not be market observable and are therefore estimated based on assumptions. i. Property and equipment Property and equipment are stated at cost, net of accumulated depreciation and accumulated impairment. The cost of additions and major improvements are capitalised; maintenance and repairs are charged to the consolidated statement of income as incurred. Gains or losses on disposal are reflected in other income. Depreciation is calculated using the straight-line method over the estimated useful lives of 3 years other than freehold land, which is deemed to have an indefinite life. j. Fair values Fair value is determined for each financial asset individually in accordance with the valuation policies set out below: (i) For investments that are traded in organised financial markets, fair value is determined by reference to the quoted market bid prices prevailing on the consolidated statement of financial position date. (ii) For unquoted investments, fair value is determined by reference to recent significant buy or sell transactions with third parties that are either completed or are in progress. Where no recent significant transactions have been completed or are in progress, fair value is determined by reference to the current market value of similar investments or applying relevant valuation techniques such as net present value of estimated future cash flows. (iii) For investments that have fixed or determinable cash flows, fair value is based on the net present value of estimated future cash flows determined by the Group using current profit rates for investments with similar terms and risk characteristics. (iv) Investments which cannot be remeasured to fair value using any of the above techniques are carried at cost, less provision for impairment. k. Goodwill Goodwill acquired in a business combination is initially measured at cost being the excess of the cost of the business combination over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities acquired. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment annually, or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to the cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquire are assigned to those units or groups of units. Impairment is determined by assessing the recoverable amount of the cash-generating unit, to which the goodwill relates. Where the recoverable amount of the cash-generating unit is less than the carrying amount, an impairment loss is recognised. l. Intangible assets Intangible assets comprise principally the value of computer software. Intangible assets acquired are measured on initial recognition at cost. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses.




m. Dividends Dividends to shareholders are recognised as liabilities in the period in which they are declared. n. Revenue recognition Profit from Islamic finances Profit from Islamic finances (murabaha and wakala) is recognised when the income is both contractually determinable and quantifiable at the commencement of the transaction. Such income is recognised on a time-apportioned basis over the period of the transaction. Where the income from a contract is not contractually determinable or quantifiable, it is recognised when the realisation is reasonably certain or when actually realised. Income related to accounts that are 90 days overdue is excluded from the consolidated statement of income. Profit on subordinated loan Profit on subordinated loan is recognised when the income is both contractually determinable and quantifiable at the commencement of the transaction. Such income is recognised using the effective profit rates over the period of the contract. Recognition of income is suspended when the Group believes that the recovery of these amounts may be doubtful. Rental Income from investment in ijarah assets Rental Income from investment in ijarah assets is recognized on the basis of contractual amounts receivable on a time apportioned basis. Income from investment in Sukuk Income from investment in Sukuk is recognised on a time-apportioned basis using the effective profit method.

Dividend income Dividend income is recognised when the right to receive is established. This is usually the ex-dividend date for equity securities. Investment advisory services income Investment advisory services income is recognised when the services are provided and income is earned. This is usually when the Bank has performed all significant acts in relation to a transaction and it is highly probable that the economic benefits from the transaction will flow to the Bank. Significant acts in relation to a transaction are determined based on the terms agreed in the private placement memorandum/contracts for each transaction. o. Earnings prohibited by Shari’a The Group is committed to avoid recognising any income generated from non-Islamic sources. Accordingly all non-Islamic income is credited to a charity fund which the Group uses for social welfare activities. p. Zakah Zakah is calculated using the net invested funds method as prescribed by the Bank’s Shari’a Supervisory Board . Zakah is the responsibility of individual shareholders. However, it is paid by the Bank on behalf of the shareholders based on statutory reserve, foreign exchange translation reserves and retained earning balances at the end of the year with the payment of Zakah on share capital being the responsibility of the Bank’s shareholders. q. Employees’ end of service benefits Provision is made for end of service indemnity payable under the Bahraini Labor Law applicable to non-Bahraini employees’ accumulated periods of service at the consolidated statement of financial position date. Bahraini employees of the Group are covered by contributions made to the Social Insurance Organisation as a percentage of the employees’ salaries. The Group’s obligations are limited to these contributions, which are expensed when due. The Bank also operates a voluntary employees saving scheme under which the Bank and the employee contribute monthly on a fixed





percentage of salaries basis. The scheme is in the nature of a defined contribution scheme and contributions by the Bank are recognised as an expense in the income statement when they are due. r. Provisions Provisions are recognised when there is a present obligation (legal or constructive) arising from a past event and the costs to settle the obligation are both probable and able to be reliably measured. s. Impairment of financial assets An assessment is made at each consolidated statement of financial position date to determine whether there is objective evidence that a specific financial asset may be impaired. If such evidence exists, any impairment loss is recognised in the consolidated statement of income. Specific provisions are created to reduce all impaired financial contracts to their realisable cash equivalent value. Financial assets are written off only in circumstances where effectively all possible means of recovery have been exhausted. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment value was recognised, the previously recognised impairment loss is reversed. Any subsequent reversal of an impairment loss is recognised in the consolidated statement of income. In the case of equity-type instruments at fair value through equity, impairment is reflected directly as a write down of the financial asset. Impairment losses on equity-type instruments at fair value through equity are not reversed through the consolidated statement of income. Any subsequent increases in their fair value are recognised directly in owners’ equity. t. Foreign currencies Foreign currency transactions at the subsidiary level Transactions in foreign currencies are recorded at the rate of exchange ruling at the date of the transaction. The monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the financial position date. All differences are taken to the statement of income at the entity level. Foreign currency translations As at the reporting date, assets and liabilities in foreign currencies are translated into the presentational currency of the Group (United States Dollars) at the rate of exchange ruling at the financial position date and their income statements are translated at the average exchange rates for the year. The exchange differences arising on the translation are taken directly to a separate component of owners’ equity. On disposal of a foreign entity, the deferred cumulative amount recognised in owners’ equity relating to that particular foreign entity is recognised in the consolidated statement of income. u. Judgements and estimates The preparation of the Group’s financial statements requires management to make judgements, estimates and assumptions that affect the amounts reported in the consolidated financial statements. The most significant uses of judgements and estimates are as follows:

Going concern The Group’s management has made an assessment of the Group’s ability to continue as a going concern and is satisfied that the Group has the resources to continue in business for the foreseeable future. Furthermore, the Board of Directors is not aware of any material uncertainties that may cast significant doubt upon the Group’s ability to continue as a going concern. Therefore, the consolidated financial statements continue to be prepared on a going concern basis. Classification of investments Management decides on acquisition of an investment whether it should be classified as an equity-type instrument at fair value through statement of income, an equity-type instrument at fair value through equity or a debt-type instrument at amortised cost.

Special purpose entities The Group sponsors the formation of special purpose entities (SPE’s) primarily for the purpose of allowing clients to hold investments. The Group provides corporate administration, investment management and advisory services to these SPE’s, which involve the Group making




decisions on behalf of such entities. The Group administers and manages these entities on behalf of its clients, who are by and large third parties and are the economic beneficiaries of the underlying investments. The Group does not consolidate SPE’s that it does not have the power to control. In determining whether the Group has the power to control an SPE, judgments are made about the objectives of the SPE’s activities, its exposure to the risks and rewards, as well as about the Group intention and ability to make operational decisions for the SPE and whether the Group derives benefits from such decisions. Qualifying hedge relationships In designating financial instruments in qualifying hedging relationships, the Group has determined that it expects the hedges to be highly effective over the period of the hedging relationship. Impairment losses on financing contracts with customers The Group reviews its financing contracts at each reporting date to assess whether an impairment allowance should be recorded in the consolidated financial statements. In particular, judgment by management is required in the estimation of the amount and timing of future cash flows when determining the level of allowance required. Such estimates are based on assumptions about factors involving varying degrees of judgment and uncertainty and actual results may differ resulting in future changes to the provisions. Impairment of equity-type instruments at fair value through equity The Group treats equity-type instruments at fair value through equity as impaired when there has been a significant or prolonged decline in the fair value below its cost or where other objective evidence of impairment exists. The determination of what is ‘significant’ or ‘prolonged’ requires judgment. The Group evaluates factors, such as the historical share price volatility for comparable quoted equities and future cash flows and the discount factors for comparable unquoted equities. Liquidity The Group manages its liquidity through consideration of the maturity profile of its assets and liabilities which is set out in the liquidity risk disclosures in Note 29 (a). This requires judgment when determining the maturity of assets and liabilities with no specific maturities. v. Derecognition A financial asset (or, where applicable a part of a financial asset or part of a Group of similar financial assets) is derecognised when: (i) the right to receive cash flows from the asset have expired; (ii) the Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a ‘pass through’ arrangement; or (iii) the Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. A financial liability is derecognised when the obligation specified in the contract is discharged, cancelled or expired. w. Offsetting financial instruments Financial assets and financial liabilities are only offset and the net amount reported in the consolidated statement of financial position when there is a legally enforceable or religious right to set off the recognised amounts and the Group intends to either settle on a net basis, or to realise the asset and settle the liability simultaneously. x. Shari’a supervisory board The Group’s business activities are subject to the supervision of a Shari’a supervisory board consisting of three members appointed by the general assembly of shareholders. y. Trade date accounting All “regular way” purchases and sales of financial assets are recognised on the trade date, i.e. the date that the Group commits to purchase or sell the asset.




3 CASH AND BANK BALANCES

2012 2011

Cash in hand 10 10

Balances with banks 15,644 3,009

15,654 3,019

4 DUE FROM FINANCIAL INSTITUTIONS

2012 2011

Commodity murabahas 109,409 342,259

Wakala contracts 49,024 83,670

158,433 425,929

Less: Deferred profits (30) (81)

158,403 425,848 The original maturity of commodity murabahas and wakala contracts are as follows:

2012 2011

Original maturity of 90 days or less 154,197 395,423

Original maturity of more than 90 days 4,206 30,425

158,403 425,848

5 FINANCING RECEIVABLES

2012 2011

Murabaha financing - 317,008

- 317,008

This represents the murabaha financing facility provided by the Bank to one of its associate companies. This associate was converted into a subsidiary upon conversion of the convertible portion of the above murabaha on 29 March 2012. The remaining financing receivables balance has been eliminated in full on consolidation.




6 INVESTMENT IN IJARAH ASSETS

Aircraft Oil rigs Total

Cost:

At 1 January 2012 - - -

Conversion of an associate to subsidiary (note 8) - 433,509 433,509

Additions 100,000 7,380 107,380

At 31 December 2012 100,000 440,889 540,889

Depreciation:

At 1 January 2012 - - -

Conversion of an associate to subsidiary (note 8) - 4,067 4,067

Charge for the year 3,300 4,159 7,459

At 31 December 2012 3,300 8,226 11,526

Net book value:

As at 31 December 2012 96,700 432,663 529,363

As at 31 December 2011 - - -

7 INVESTMENT SECURITIES

Amortised Cost Fair value through equity Total

At 31 December 2012

Debt type

Quoted investments

Sukuk 392,967 - 392,967

Unquoted investments

Debt securities 79,215 - 79,215

Equity type


Equity shares - 45,205 45,205

472,182 45,205 517,387

Provision for impairment - (20,000) (20,000)

472,182 25,205 497,387




Amortised Cost Fair value through equity Restated Total

At 31 December 2011

Debt type

Quoted investments

Sukuk 224,406 - 224,406


Debt securities 79,215 - 79,215

Equity type


Equity shares - 45,205 45,205

303,621 45,205 348,826

Provision for impairment - (20,000) (20,000)

303,621 25,205 328,826

8 INVESTMENT IN ASSOCIATES

2012 2011

At 1 January 92,116 97,342

Acquisitions during the year 48,078 -

Elimination of intra-group transactions (1,078) (6,057)

Share of results of associates (7,067) 831

Conversion of an associate to subsidiary (31,000) -

At 31 December 101,049 92,116

On 29 March 2012, the Bank exercised its equity conversion option on a murabaha financing facility provided to one of its associate companies which resulted in a gain of US$ 21,759 thousand and the conversion of the associate into a 59.44% owned subsidiary which is consolidated in these consolidated financial statements.Intra-group gains on transactions between the Group and its equity accounted associates are eliminated to the extent of the Group’s interest in the investees.

Investment in associates comprise the following:

Name Country of incorporation % holding Nature of business

Arab Drilling and Workover Company * Libya 40% Lease of oil drilling rigs

Al Izz Islamic Bank ** Oman 15% Islamic Banking


7 INVESTMENT SECURITIES (continued)



Summarised financial information of associates that have been equity accounted, not adjusted for the percentage ownership held by the Group.

2012 2011

Total assets 458,407 683,299

Total liabilities 54,700 399,193

Total revenues 52,094 17,052

Total net loss (18,615) 2,044

* Based on the audited accounts received from Arab Drilling and Workover Company, management has equity accounted losses of US$ 20,822 thousand for the year ended 31 December 2011. Further, the management has equity accounted for estimated income of US$ 1,771 thousand for the period ended 30 November 2012 based on the approved unaudited management accounts.

** Based on the audited accounts received from Al Izz Islamic Bank, the management has estimated losses of US$ 436 thousand for the period ended 1 November 2012 which have been accounted for in these consolidated financial statements.

9 OTHER ASSETS

2012 2011

Project work-in-progress * 46,101 42,884

Liquidity reserve receivable ** 11,136 -

Profit receivable on subordinated loan (note 19) 10,657 -

Deferred expenses 5,134 -

Ijarah receivable 4,910 -

Goodwill 2,309 2,309

Advances paid 1,656 -

Fair value of equity option embedded in a convertible murabaha (note 5) - 1,386

Intangible assets – software 248 295

Due from associate 67 2,257

Others 7,045 3,660

89,263 52,791

*Project work-in-progress comprises costs incurred for the acquisition and development of a project in the Kingdom of Saudi Arabia by a subsidiary company.

** Liquidity reserve receivable represents an amount that has been funded by Al Dur Energy Investment Company to Al Dur Power and Water Company («the Company») to meet the liquidity reserve account (LRA) funding requirement under the common term agreement entered into on 29 June 2009, whereby the shareholders are required to fund such account in meeting the repayment of senior debt obligations.




10 PROPERTY AND EQUIPMENT

Land EquipmentMotor

vehicle ComputersFurniture

and fixture Total

Cost:At 1 January 2011 22,994 185 - 783 6,824 30,786 Additions - 11 - 5 16 32

At 31 December 2011 22,994 196 - 788 6,840 30,818 Additions - 10 71 22 1 104

At 31 December 2012 22,994 206 71 810 6,841 30,922

Depreciation:At 1 January 2011 - 82 - 436 2,823 3,341 Charge for the year - 62 - 252 2,280 2,594

At 31 December 2011 - 144 - 688 5,103 5,935 Charge for the year - 44 1 87 1,716 1,848

At 31 December 2012 - 188 1 775 6,819 7,783

Provision for impairment:At 1 January 2011 12,534 - - - - 12,534 Charge for the year (note 23) 1,260 - - - - 1,260

At 31 December 2011 13,794 - - - - 13,794 Charge for the year - - - - - -

At 31 December 2012 13,794 - - - - 13,794

Net book values:At 31 December 2012 9,200 18 70 35 22 9,345

At 31 December 2011 9,200 52 - 100 1,737 11,089

11 DUE TO FINANCIAL INSTITUTIONS

2012 2011

Commodity murabaha contracts - 33,616

Wakala contracts 59,612 55,911

59,612 89,527




12 MURABAHA PAYABLE

On 10 May 2012, MENAdrill Investment Company (the «Subsidiary») refinanced a facility of US$ 130,000 thousand granted by the Bank of which US$ 55,000 thousand was advanced by another bank.

13 TERM FINANCING

In January 2012, FEB-Novus Fin One Ltd (the «Company») raised term financing of US$ 72,000 thousand to partially fund the acquisition of an Airbus A330-300 aircraft. The term financing matures in January 2024 and bears a profit rate of 1 month Libor plus 345bps per annum. This Company is consolidated in FEB-Novus Aircraft Holding Company, Bahamas (98.5% owned subsidiary of the Bank) in compliance with AAOIFI «Statement of financial accounting No.1: Conceptual Framework for the financial reporting by Islamic Financial Institutions». The financing arrangement is between the Company and the ultimate finance provider.

14 OTHER LIABILITIES

2012 2011

Accounts payable 8,504 2,370

Employee-related accruals 8,439 6,219

Accrued expenses 4,675 2,086

Advance from investors - 4,505

Zakat and charity payable 25 1

Collective impairment provision (note 23) 4,077 -

Payables to financial institutions * 33,272 83,287

58,992 98,468

* These relate to funds from a Libyan entity frozen by the Bank as per CBB circular EDFIS/C/011/2011 dated 31 March 2011. During the year, the CBB (via circular EDFIS/001/2012 dated 5 January 2012) removed the name of the Central Bank of Libya from its list of individuals and entities subject to the asset freeze. Accordingly, the Bank reclassified the funds from Central Bank of Libya to due to financial institutions.

15 EQUITY ATTRIBUTABLE TO SHAREHOLDERS OF THE PARENT

(a) Share capital

2012 2011

Authorised:

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

Issued, subscribed and paid-up:

1,000,000,000 ordinary shares of US$ 1 each 1,000,000 1,000,000




(i) The Group has only one class of equity shares and the holders of these shares have equal voting rights.

(ii) Names and nationalities of the major shareholders and the percentage of equity shares held in which they have an interest of 5% or more of outstanding shares are as follows:

2012 2011Country of

incorporation% of

holdingShare

capital% of

holdingShare

capital

Tasameem Real Estate UAE 21.85% 218,504 16.25% 162,500

Libyan Investment Authority Libya 16.25% 162,500 16.25% 162,500

Abu Dhabi Water and Electricity Authority UAE 15.00% 150,000 15.00% 150,000

Emirates Islamic Bank UAE 10.00% 100,000 10.00% 100,000

Mohammed Bin Hussain Bin Ali Al Amoudi KSA 5.00% 50,000 5.00% 50,000

AlJabr Trading Co KSA 5.00% 50,000 5.00% 50,000

Ithmaar Development Co Ltd Bahrain 4.50% 45,000 5.00% 50,000

(iii) The distribution schedule of equity shares, setting out the number of holders and percentage of holding is as follows:

At 31 December 2012Number of

sharesNumber of

shareholders

% of totaloutstanding

shares Categories

Less than 5% 268,996 16 26.90%

5% up to less than 10% 100,000 2 10.00%

10% up to less than 25% 631,004 4 63.10%

1,000,000 22 100.00%

At 31 December 2011Number of

sharesNumber of

shareholders

% of totaloutstanding

shares Categories

Less than 5% 275,000 19 27.50%

5% up to less than 10% 150,000 3 15.00%

10% up to less than 25% 575,000 4 57.50%

1,000,000 26 100.00%

(b) Reserves

Statutory reserveIn accordance with the Bahrain Commercial Companies Law and the Bank’s articles of association, 10% of the net income for the year is transferred to the statutory reserve until such time as the reserve reaches 50% of the paid-up share capital. The reserve is not distributable except in such circumstances as stipulated in the Bahrain Commercial Companies Law and following the approval of the CBB. US$ 2,984 thousand (2011: US$ 363 thousand) was transferred during the year.


15 EQUITY ATTRIBUTABLE TO SHAREHOLDERS OF THE PARENT (continued)



Foreign currency translation reserveThe foreign currency translation reserve is used to record exchange differences arising from the translation of the net investment in foreign operations.

16 NON-CONTROLLING INTEREST

2012 2011

At 1 January 37,591 37,599

Net income (loss) for the period/ year 7,186 (86)

Conversion of an associate to subsidiary (note 8) 74,882 -

Acquisition of a new subsidiary 462 -

Dividends of subsidiary (31) -

Increase in share capital 4,771 78

124,861 37,591

17 PROFIT FROM ISLAMIC FINANCES

2012 2011

Profit on murabaha financing 4,072 12,964

Profit on commodity murabaha and wakala contracts 1,018 3,071

Profit on musharaka financing - 672

5,090 16,707

18 INCOME FROM INVESTMENTS

2012 2011

Income from Sukuk 11,465 5,929

Gain on sale of Sukuk 5,794 1,320

17,259 7,249

19 PROFIT ON SUBORDINATED LOAN

A profit of 3.85% per annum has been accrued on the outstanding principal amount of the subordinated loan of US$ 79,215 thousand from 23 July 2009 granted by Al Dur Energy Investment Company to Al Dur Power and Water Company. The profit was not recognised until the commencement of commercial operations of the power plant, which occurred in February 2012. The commencement date was delayed, and management viewed it as conservative to start accrual of profit only after commencement of commercial operations.




20 STAFF COSTS

2012 2011

Salaries and benefits 8,308 9,139

Other staff expenses 2,348 1,498

10,656 10,637

21 DEPRECIATION AND AMORTISATION

2012 2011

Depreciation - investment in ijarah assets (note 6) 7,459 -

Depreciation - property and equipment (note 10) 1,848 2,594

Amortisation - intangible assets 231 251

9,538 2,845

22 OTHER EXPENSES

2012 2011

Repairs and maintenance 3,824 -

Insurance expense 1,851 -

Board and shari’a committee expenses 1,612 708

Rent and utilities 1,577 1,598

Professional and consultancy fee 1,509 215

Loss on fair value of equity option 1,386 1,959

Travelling and related expenses 144 127

Advertising and marketing expenses 50 58

Others 3,073 1,601

15,026 6,266

23 PROVISION FOR IMPAIRMENT

2012 2011

Collective impairment 4,077 -

Land (note 10) - 1,260

4,077 1,260




24 RELATED PARTY BALANCES AND 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 comprise major shareholders, directors, shari’a supervisory board, external auditors and executive management of the Group and/or entities over which they exercise control and/or significant influence.

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

Associates

Keymanagement

personnel/Shari’a board

members/external auditors

Significantshareholders / entities in

whichdirectors are

interested31 December

2012 Associates

Keymanagement

personnel/Shari’a board

members/external auditors

Significantshareholders / entities in

whichdirectors are

interested31 December

2011

Assets Cash and bank balances - - 417 417 - - 375 375 Due from financial institutions - - 11,801 11,801 - - 15,003 15,003 Financing receivables - - - - 317,007 - - 317,007 Investment securities - - 70,291 70,291 - - 20,000 20,000 Investment in associates 101,049 - - 101,049 92,116 - - 92,116 Other assets 67 - - 67 3,694 - - 3,694

Liabilities Due to financial institutions - - 9,601 9,601 - - 15,403 15,403 Other liabilities - 488 34,372 34,860 4,505 625 32,939 38,069

IncomeProfit from Islamic finances 4,072 - 124 4,196 12,964 - 341 13,305 Profit on Islamic finances - - (365) (365) - - (352) (352)Income from investments - - 2,107 2,107 - - 790 790 Share of results of associates (7,067) - - (7,067) 831 - - 831 Gain arising on conversion of associate to subsidiary 21,759 - - 21,759 - - - -

Other income 20 - - 20 1,478 - - 1,478

ExpensesStaff costs - 1,543 - 1,543 - 1,687 - 1,687 Other expenses 1,386 274 1,516 3,176 1,959 165 604 2,728

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:

2012 2011

Board member fees 1,516 604 Salary and other short-term benefits 1,450 1,468 Post employment benefits 93 219

3,059 2,291




25 ZAKAH

Zakah payable by the shareholders in respect of each share for the year ended 31 December 2012 is US cents 1.75 (2011: US cents 1.69) for every share held. US cents 0.09 (2011: US cents 0.01) is payable by the Bank in their capacity as the agents of the shareholders and US cents 1.66 (2011: US cents 1.68) is the responsibility of the individual shareholders.

26 SEGMENT INFORMATION

a) Industry sector

The industrial distribution of the Group’s assets and liabilities as of 31 December 2012 is as follows:

Banks and financialinstitutions

Energy, power andinfrastructure Others Total

2012AssetsCash and bank balances 15,654 - - 15,654 Due from financial institutions 158,403 - - 158,403 Investment in ijarah assets - 432,663 96,700 529,363 Investment securities 277,086 104,420 115,881 497,387 Investment in associates 48,012 53,037 - 101,049 Other assets - 37,713 51,550 89,263 Property and equipment - - 9,345 9,345

Total assets 499,155 627,833 273,476 1,400,464

LiabilitiesDue to financial institutions 59,612 - - 59,612 Murabaha payable 54,081 - - 54,081 Term Financing 68,200 - - 68,200 Other liabilities 33,272 4,675 21,045 58,992

Total liabilities 215,165 4,675 21,045 240,885

The industrial distribution of the Group’s assets and liabilities as of 31 December 2011 is as follows:

2011AssetsCash and bank balances 3,019 - - 3,019 Due from financial institutions 425,848 - - 425,848 Financing receivables - 317,008 - 317,008 Investment securities 173,643 104,420 50,763 328,826 Investment in associates - 92,116 - 92,116 Other assets - 4,617 48,174 52,791 Property and equipment - - 11,089 11,089

Total assets 602,510 518,161 110,026 1,230,697

LiabilitiesDue to financial institutions 89,527 - - 89,527 Other liabilities 83,287 6,505 8,676 98,468

Total liabilities 172,814 6,505 8,676 187,995




b) Geographic sector

The geographical distribution of the Group’s assets and liabilities as of 31 December 2012 is as follows:

MENA Europe America Asia Total

2012

AssetsCash and bank balances 11,788 3,006 860 - 15,654 Due from financial institutions 129,226 9,339 19,838 - 158,403 Investment in ijarah assets - - 432,663 96,700 529,363 Investment securities 426,794 40,239 - 30,354 497,387 Investment in associates 101,049 - - - 101,049 Other assets 74,430 4,910 7,000 2,923 89,263 Property and equipment 9,345 - - - 9,345

Total assets 752,632 57,494 460,361 129,977 1,400,464

LiabilitiesDue to financial institutions 59,612 - - - 59,612 Murabaha payable 54,081 - - - 54,081 Term financing - 68,200 - - 68,200 Other liabilities 51,560 - 7,417 15 58,992

Total liabilities 165,253 68,200 7,417 15 240,885

The geographical distribution of the Group’s assets and liabilities as of 31 December 2011 is as follows:

2011

AssetsCash and bank balances 2,170 - 849 - 3,019 Due from financial institutions 328,524 47,773 49,551 - 425,848 Financing receivables - - 317,008 - 317,008 Investment securities 308,826 - - 20,000 328,826 Investment in associates 60,658 - 31,458 - 92,116 Other assets 49,148 - 3,643 - 52,791 Property and equipment 11,089 - - - 11,089

Total assets 760,415 47,773 402,509 20,000 1,230,697

LiabilitiesDue to financial institutions 83,797 5,730 - - 89,527 Other liabilities 93,963 - 4,505 - 98,468

Total liabilities 177,760 5,730 4,505 - 187,995




26 SEGMENT INFORMATION (continued)

The Group’s revenue and expenses are reviewed at a Group level and therefore no separate operating segment results and other disclosures are provided in these consolidated financial statements.

27 COMMITMENTS

2012 2011

Other capital commitments 67,856 61,856

Forward treasury commitments 9,602 21,909

Operating lease commitments 510 1,531

77,968 85,296

In its normal course of business, the Bank initially undertakes contractual commitments in relation to project assets and then places the project with its investors along with the associated contractual commitments. Further, the Group has arranged for bank guarantees amounting to US$ 11.94 million (2011: US$ 11.94 million) in relation to performance obligations against its investment in a project through one of its subsidiaries.

28 FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value is the amount for which an asset could be exchanged or a liability settled between knowledgeable and willing parties in an arm’s length transaction. Consequently, differences can arise between carrying values and fair value estimates.

Included under investment in securities (note 7) are certain equity-type instruments at fair value through equity which are carried at cost, due to the unpredictable nature of their future cash flows and the lack of other suitable methods for arriving at a reliable fair value for these investments.

The fair values of the Group’s other financial instruments are not significantly different from their carrying values as at 31 December 2012 and 2011.

29 RISK MANAGEMENT

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

• liquidity risk;

• credit risk;

• market risks;

• profit rate risk in banking book; and

• operational risk




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

This note presents information about the Group’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.

The Management Risk Committee is responsible for recommending policy and framework to the Board Audit and Risk Committee, which in turn is responsible for reviewing and recommending to the Board for approval. The Risk Management Department 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 Group’s business and the related risk management processes are as follows:

(a) Liquidity risk

Liquidity risk is defined as the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities that are to be settled by delivering cash or another financial asset. The Group’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 Group’s reputation.

The Board of Directors approves all significant policies and strategies related to the management of liquidity. Management Committees including the Asset Liability Committee and the Management Risk Committee review the liquidity profile of the Group on a regular basis and any material change in the current or prospective liquidity position is notified to the Board through the Board Audit and Risk Committee.

The Risk Management Department monitors the liquidity profile of the Bank on an ongoing basis to ensure that the liquidity gap is within regulatory limits and the liquidity gap and key liquidity ratios are within the internal Board approved limits.

Details of the Group’s liquid assets to total assets at the reporting date and during the reporting period were as follows:

Liquid assets/ Total assets

2012 2011

At 31 December 0.40 0.53

Average for the year 0.39 0.52

The table below summarises the maturity profile of the Group’s assets and liabilities as of 31 December 2012 based on expected periods to cash conversion from the consolidated statement of financial position date:




29 RISK MANAGEMENT (continued)

2012

Up to 3 months

3 to 6months

6 monthsto 1 year

1 to 3years

3 to 5years

5 to 10years

10 to 20years

No fixedmaturity

Total

Asset

Cash and bank balances 15,654 - - - - - - - 15,654

Due from financial institutions 154,197 4,206 - - - - - - 158,403

Investment in ijarah assets - - - - - - - 529,363 529,363

Investment securities 200 - - 235,474 244,718 16,995 - - 497,387

Investment in associates - - - - - - - 101,049 101,049

Other assets 230 565 85,911 - - - - 2,557 89,263

Property and equipment - - - - - - - 9,345 9,345

Total assets 170,281 4,771 85,911 235,474 244,718 16,995 - 642,314 1,400,464

Liabilities

Due to financial institutions 59,612 - - - - - - - 59,612

Murabaha payable - - - 54,081 - - - - 54,081

Term financing 1,114 1,082 2,181 9,189 8,745 24,857 21,032 - 68,200

Other liabilities 40,738 - 14,177 - - - - 4,077 58,992

Total liabilities 101,464 1,082 16,358 63,270 8,745 24,857 21,032 4,077 240,885

Net gap 68,817 3,689 69,553 172,204 235,973 (7,862) (21,032) 638,237 1,159,579

Cumulative net gap 68,817 72,506 142,059 314,263 550,236 542,374 521,342 1,159,579

Commitments 27,793 255 49,920 - - - - - 77,968

The table below summarises the maturity profile of the Group’s assets and liabilities as of 31 December 2011 based on expected periods to cash conversion from the consolidated statement of financial position date:




2011

Up to 3 months

3 to 6months

6 monthsto 1 year

1 to 3years

3 to 5years

5 to 10years

10 to 20years

No fixedmaturity

RestatedTotal

Asset

Cash and bank balances 3,019 - - - - - - - 3,019

Due from financial institutions 425,848 - - - - - - - 425,848

Financing receivables 56,921 6,104 19,109 117,574 117,300 - - - 317,008

Investment securities 24,742 - - 155,183 148,901 - - - 328,826

Investment in associates - - - - 92,116 - - - 92,116

Other assets 1,438 - 48,749 - - - - 2,604 52,791

Property and equipment - - - - - - - 11,089 11,089

Total assets 511,968 6,104 67,858 272,757 358,317 - - 13,693 1,230,697

Liabilities

Due to financial institutions 89,527 - - - - - - - 89,527

Other liabilities 1,089 92,249 5,130 - - - - - 98,468

Total liabilities 90,616 92,249 5,130 - - - - - 187,995

Net gap 421,352 (86,145) 62,728 272,757 358,317 - - 13,693 1,042,702

Cumulative net gap 421,352 335,207 397,935 670,692 1,029,009 1,029,009 1,029,009 1,042,702

Commitments 34,100 255 50,430 511 - - - - 85,296

The contractual maturities of the financial assets and liabilities are not significantly different from their expected maturities and the Bank does not have assets and liabilities with contractual maturities beyond 20 years.





(b) Credit risk

Credit risk is the risk that one party to a financial contract will fail to discharge an obligation and cause the other party to incur a financial loss, and for the Group it arises principally from the commodity murabaha and wakala placed with financial institutions, investments in Sukuks and financing receivables.

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

Management of credit riskCredit risk is assessed and approved on an individual basis for each counterparty at least once a year as a part of the internal risk review process. As at 31 December 2012, all credit exposures were appropriately approved by the relevant authority level. The credit risk assessment conducted as a part of the internal risk review process included rating each exposure using industry specific rating models which consider key risk factors to assign the internal credit rating. The Bank assigns rating-based credit limits for all counterparty banks and financial institutions with whom it places short-term funds. All placements during the year were with financial institutions having internal and / or external credit ratings mapped to the “Standard” credit category of the Bank. The Bank also conducts detailed assessments of the equity investment opportunities to evaluate the commercial viability of the investments. Sukuk investments and Islamic Financing Facilities during the year were with obligors who were either banks, sovereigns or sovereign owned companies, subsidiaries, and were rated externally and/or internally. The Bank monitors the creditworthiness of the counterparties and the performance of the exposures with regard to timeliness of payments and other credit conditions on an ongoing basis. Annual and interim credit reviews are conducted to check the credit quality and impairment assessment requirement, if any.

The Bank attempts to reduce credit risk by assigning limits for each counterparty, monitoring credit exposure, and continuously assessing the creditworthiness of counterparties. The Bank uses external ratings for regulatory purposes.

In addition to external ratings, the Bank assigns an internal rating which is mapped to the lowest external rating, in cases where the entity is rated by more than one credit rating agency. The external ratings used for this purpose are those issued by S&P, Moody’s, Fitch and Capital Intelligence. In case the entity is not rated externally the Bank assigns an internal rating based on an in house credit assessment.

The Bank performs collective assessment of impairment for its credit exposures on a quarterly basis as per the the Bank’s internal guidelines. Credit exposures are also subject to regular reviews by the Risk Management Department.

During the year, the Bank has not made any specific provision on any of its credit or investment exposures due to impairment or restructuring. There were no financing facilities during the year and, therefore no restructuring happened (2011: US$ 317,008 thousand).

Maximum exposure to credit riskThe table below shows the gross maximum exposure to credit risk for the components of the consolidated statement of financial position. The figures represent gross exposure net of any impairment provision, without taking into account any collateral held and other credit mitigates.

Maximum exposure2012 2011

Balances with banks 15,644 3,009 Due from financial institutions 158,403 425,848 Financing receivables - 317,008 Investment securities 472,182 303,621 Other assets 81,142 48,154

727,371 1,097,640

As of 31 December 2012 (2011: nil), none of the above exposures are either past due or impaired.




Credit quality per class of financial assetsThe table below analyses the Group’s maximum credit exposure where the credit quality is reflected by external credit ratings (S&P, Moody’s, Fitch and Capital Intelligence) of the counterparties where relevant:

Bankbalances

Due fromfinancial

institutionsFinancing

receivablesInvestment

securitiesOtherassets Total

2012

Prime to High grade: AAA – AA 2,434 53,342 - 54,004 - 109,780

Medium grade: A – BBB 8,736 75,360 - 271,503 - 355,599 Non-investment/

speculative: BB – B 4,263 - - 21,362 - 25,625 Unrated 211 29,701 - 125,313 81,142 236,367

15,644 158,403 - 472,182 81,142 727,371

Bankbalances

Due fromfinancial

institutionsFinancing

receivablesInvestment

securitiesOtherassets

RestatedTotal

2011

Prime to High grade: AAA – AA 2,566 132,834 - 15,180 - 150,580

Medium grade: A – BBB 17 176,699 - 173,643 - 350,359 Non-investment/

speculative: BB – B 28 48,703 - - - 48,731 Substantial risk: Below B 23 - - - - 23 Unrated 375 67,612 317,008 114,798 48,154 547,947

Total carrying amount 3,009 425,848 317,008 303,621 48,154 1,097,640

Concentration RiskConcentration risk is the risk of insufficient diversification of the portfolio resulting in an adverse impact of an external event on portfolio constituents sensitive to similar risk factors. Concentration risk in portfolios primarily arises due to name, product, sector and geographic concentration.

The Bank strictly adheres to the regulatory guidelines in respect of large exposures and connected and related counterparty exposures to effectively manage name concentration. Any excesses above the said limits are reported to the CBB and treated in accordance to the regulatory guidelines by way of capital deduction. In addition, the Bank has established internal limits on the maximum permissible exposures to sectors for managing sector concentration.

In respect of geographical concentration the Bank has defined limits for each country / geography which is based on the lowest among the available ratings by S&P, Moody’s, Fitch and Capital Intelligence. The Bank also closely monitors political risk arising from events in each country of exposure.

The Group’s financial assets with credit risk, before taking into account any collateral held or other credit enhancements, can be analysed by the following industry sector:






Energy, power andinfrastructure Others Total

2012

Balances with banks 15,644 - - 15,644 Due from financial institutions 158,403 - - 158,403 Investment securities 277,086 79,215 115,881 472,182 Other assets - 30,270 50,872 81,142

451,133 109,485 166,753 727,371


Energy, power andinfrastructure Others Restated

Total2011

Balances with banks 3,009 - - 3,009 Due from financial institutions 425,848 - - 425,848 Financing receivables - 317,008 - 317,008 Investment securities 173,643 79,215 50,763 303,621 Other assets - 2,308 45,846 48,154

602,500 398,531 96,609 1,097,640

The Group’s financial assets with credit risk, before taking into account any collateral held or other credit enhancements, can be analysed by the following geographical regions:

MENA Europe America Asia Total

2012

Balances with banks 11,778 3,006 860 - 15,644

Due from financial institutions 129,226 9,339 19,838 - 158,403

Investment securities 442,951 18,877 - 10,354 472,182

Other assets 71,445 4,910 4,605 182 81,142

655,400 36,132 25,303 10,536 727,371

2011

Balances with banks 2,160 - 849 - 3,009

Due from financial institutions 328,524 47,773 49,551 - 425,848

Financing receivables - - 317,008 - 317,008

Investment securities 303,621 - - - 303,621

Other assets 45,897 - 2,257 - 48,154

680,202 47,773 369,665 - 1,097,640




(c) Market Risk

Market risk is the risk that changes in market prices, such as profit rates, equity prices, foreign exchange rates and commodity prices will affect the Group’s income or the value of its holdings of financial instruments. Market risk comprises equity position risk, profit rate risk, commodities risk, currency risk and other price risk.

The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return on risk.

The Group does not have a trading portfolio and hence is not exposed to market risk in relation to such instruments. The Group is not exposed to commodities or price risk as there is no commodity holding either in the banking or trading book. The Group does not have any position in listed equities which would result in equity risk. Market risk for the Group arises only on account of its foreign exchange exposure in the banking book particularly on account of commodity murabaha and wakala contracts.

Currency riskCurrency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Group’s major exposure is in GCC currencies, which are primarily pegged to the US Dollars. The Bank monitors this exposure on an ongoing basis and the net open position is not significant.

The Group had the following net exposures denominated in foreign currencies (other than GCC currencies) as of 31 December:

2012 2011

Sterling Pounds 82 94 Euros 87 51 Indian Rupees 20,000 20,000 Libyan Dinars 53,037 60,658

(d) Profit rate risk in the banking book

Profit rate risk in the banking book is the exposure of the Group’s financial condition to adverse movements in profit rates. Changes in profit rates affect the Group’s earnings by changing its net profit income and the level of other profit rate sensitive income and operating expenses. Changes in profit rates also affect the underlying value of the Group’s assets and liabilities because of the absolute or economic value changes of future cash flows due to the change in profit rates. Profit rate risk primarily arises on account of reprising risk, yield curve risk, basis risk and optionality risk.

The Group’s profit rate sensitive assets are mainly commodity murabaha and wakala placed with financial institutions, financing receivables and investments in Sukuk. The Group has exposures to both fixed and floating rate Sukuk. Fixed rate Sukuk represent 95% of the total Sukuk portfolio as at 31 December 2012 (2011: 89%). The rate sensitive liabilities comprise of murabaha and wakala payable to central banks and other financial institutions.

The Group has minimal exposure to reprising and yield curve risks. Reprising risk arises on account of mismatch in profit rate fixation periods between assets and liabilities. Yield curve risk arises due to shift in the yield curve resulting in changes in the economic value of cashflows. Exposure to basis risk is not material and although the basis risk exposure is monitored, the Bank does not consider this item of profit rate risk in the internal risk calculations. The rate sensitive assets mainly comprise commodity murabaha and wakala contracts, financing receivables and Sukuk. Part of these assets are funded by rate sensitive liabilities in the form of murabaha and wakala payable. The short-term nature of these items and high degree of correlation between profits earned and paid on them minimises the basis risk. The remaining rate sensitive assets (Sukuks and residual inter-bank placements) are funded by equity. The Group is not exposed to optionality risk arising due to embedded options in rate sensitive assets or liabilities.



The Bank monitors the timing difference in the re-pricing of the Bank’s rate-sensitive assets and liabilities and resulting impact of any parallel shift in the yield curve on the expected net profit income for up to one year, and the value of equity and overall economic value of equity considering the changes in net profit income and the value of equity. The profit rate risk is managed by monitoring the sensitivity of the Bank’s financial assets and liabilities to various standard and non-standard profit rate scenarios. A standard 200 basis point (bp) profit rate shock by way of parallel shift in all yield curves is considered on a monthly basis to ensure that the resulting impact on the economic value of equity is within the limit prescribed by the Basel Committee on Banking Supervision.

Profit rate risk is managed principally through monitoring profit rate gaps and by having pre-approved limits for re-pricing bands.A summary of the Group’s profit rate gap position is as follows:

Up to 3months

3 to 6months

6 monthsto 1 year

1 to 3years

3 to 5years Total

2012

AssetsDue from financial institutions 158,403 - - - - 158,403 Investment securities 19,978 - - - - 19,978

Total assets 178,381 - - - - 178,381

LiabilitiesDue to financial institutions 59,612 - - - - 59,612 Murabaha payable - - - 54,081 - 54,081 Other liabilities - 33,272 - 33,272

Total liabilities 59,612 33,272 - 54,081 - 146,965

Profit rate sensitivity gap 118,769 (33,272) - (54,081) - 31,416

Up to 3months

3 to 6months

6 monthsto 1 year

1 to 3years

3 to 5years

RestatedTotal

2011

AssetsDue from financial institutions 425,848 - - - - 425,848 Financing receivables 56,921 6,104 19,109 117,574 117,300 317,008 Investment securities 24,742 - - - - 24,742

Total assets 507,511 6,104 19,109 117,574 117,300 767,598

LiabilitiesDue to financial institutions 89,527 - - - - 89,527 Other liabilities - 83,287 - - - 83,287

Total liabilities 89,527 83,287 - - - 172,814

Profit rate sensitivity gap 417,984 (77,183) 19,109 117,574 117,300 594,784





The sensitivity of the Group’s consolidated statement of income to a 200 basis points parallel increase (decrease) in market profit rates (assuming no asymmetrical movement in yield curves and a constant statement of financial position), would be an increase (decrease) of profit by US$ 628 thousand (2011:US$ 11,896 thousand).

Overall, profit rate risk positions are managed by Treasury, which uses commodity murabaha and wakala contracts with/ from financial institutions to manage the overall position arising from the Group’s activities.

The average effective profit rates on the financial assets and liabilities as at 31 December were as follows:

2012 2011

Due from financial institutions 0.44% 0.44%

Financing receivables - 4.90%

Investment securities 5.21% 5.43%

Due to financial institutions 0.62% 0.42%

(e) Operational risk

Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or loss resulting from external events. Operational risk also includes Legal and Shari’a non-compliance risk but excludes strategic and reputational risks.

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 has conducted Risk and Control Self Assessment of Operational Risk in all departments to identify the Key Risk Indicators as a part of the overall Operational Risk Management framework. The Bank monitors the key risks and operational risk losses on an ongoing basis and regularly reports the position to the senior management and the Board. The Bank has also implemented an IT enabled operational risk system to automate the operational risk processes namely risk and controls assessment, loss data collection and key risk indicator calculation.

30 SOCIAL RESPONSIBILITY

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

31 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.





RISK AND CAPITAL MANAGEMENT


BASEL II - PILLAR III DISCLOSURES

CONTENTS Page

1 Executive Summary 812 Introduction 81

2.1 Pillar I 812.2 Pillar II 822.3 Pillar III 82

3 Overall Risk Management 823.1 Risk Management Strategy 823.2 Risk Management Framework 833.3 Risk Types 83

4 Capital structure, management and capital adequacy 834.1 Capital and Group Structure 834.2 Capital Management 84

4.2.1 Regulatory Capital Adequacy 844.2.1.1 Regulatory Capital Structure 854.2.1.2 Regulatory Capital Requirement 85

4.2.2 Internal Capital Adequacy Assessment Process 864.3 Exposures Exceeding 15% Capital Base 86

5 Credit Risk 865.1 Credit Risk Management 865.2 Capital Requirements for Credit Risk 88

5.2.1 Credit Exposure and Risk-weighted Assets 895.2.2 Capital Requirements by Type of Islamic Financing Contract 895.2.3 Gross Funded and Unfunded Exposure 905.2.4 Impairment Provisioning 905.2.5 Equity Investments Held in Banking Book 91

5.3 Other Quantitative Information on Credit Risk 915.4 Concentration Risk 915.5 Counterparty Credit Risk 915.6 Settlement Risk 92

6 Market Risk 926.1 Capital Requirements for Market Risk 926.2 Foreign Currency Translation Risk 92

7 Operational Risk 937.1 Operational Risk Management 937.2 Legal Compliance and Litigation 937.3 Sharia’a Compliance 937.4 Capital Requirements for Operational Risk 93

8 Liquidity Risk 948.1 Maturity Profile 94

9 Profit Rate Risk in the Banking Book 9410 Reputational Risk 9511 Strategic Risk 9512 Other Risks 95


1 Executive summaryFirst Energy Bank B.S.C. (c) (the “Bank”) is a closed shareholding company incorporated in the Kingdom of Bahrain on 23rd June, 2008,

under Commercial Registration No. 69089. The Bank operates under Islamic Wholesale Banks licence issued by the Central Bank of

Bahrain (the “CBB”). The Bank’s registered office is at Building 1398, Road 4626, Block 346, Manama, Kingdom of Bahrain.

The principal activities of the Bank include Sharia’a compliant investment advisory services, participation in project development, joint

ventures, mergers and acquisitions and the purchase of assets and asset portfolios related to the energy sector. The Bank is regulated by

the CBB and supervised by a Sharia’a Supervisory Board for compliance with the Sharia’a rules and principles.

The CBB’s Basel II guidelines became effective on 1st 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 the Annual Report, CBB Rule

Book – Volume II for Islamic Banks. The requirements of the section 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 2012.

The disclosures in this report are in addition to, or in some cases serve to clarify, the disclosures set out in the consolidated financial

statements for the year ended 31 December 2012, presented in accordance with the Financial Accounting Standards (FAS) issued by the

Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI). To avoid any duplication, information required under PD

module but already disclosed in other sections of the Annual report has not been reproduced in these disclosures.

This report contains detailed qualitative and quantitative information on risk components and capital adequacy.

2 IntroductionThe 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. The Bank 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:

•PillarI:calculationoftheriskweightedamountsandregulatorycapitalrequirement.

•PillarII:thesupervisoryreviewprocess,includingtheInternalCapitalAdequacyAssessmentProcess.

•PillarIII:rulesforthedisclosureofriskmanagementandcapitaladequacyinformation.

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 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. As required by the CBB, the minimum


capital adequacy ratio for banks incorporated in Bahrain is 12% compared to the Basel Committee’s minimum recommended

ratio of 8%. The CBB also requires banks incorporated in Bahrain to maintain a buffer of 0.5% above the minimum capital

adequacy ratio. In the event that the capital adequacy ratio falls below 12.5%, 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 the Bank to maintain an effective minimum capital

adequacy ratio of 12.5%.

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 the Bank

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 recommends banks to establish the Internal Capital Adequacy Assessment Process (ICAAP) for assessing the adequacy of the available capital to cover all material risks (including those covered under Pillar I).

Under the CBB’s Pillar II guidelines, each bank is to be individually assessed by the CBB for prescribing the bank-specific minimum capital adequacy ratio. Pending finalization of the assessment process, all banks incorporated in Bahrain are required to continue to maintain the existing 12% and 8% 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. The ICAAP framework was approved by the Board. The ICAAP framework includes identification, assessment, measurement, monitoring and reporting of all material risks and maintain appropriate level of capital in line with the Bank’s overall risk profile and business plan. The ICAAP is also supplemented by developing stress scenarios and assess the impact of such scenarios on the portfolios, risk profile, capital adequacy of the Bank and ensure the adequacy of capital in such instances.

2.3 Pillar III

Pillar III of the CBB’s Basel II framework prescribe the coverage, depth, timelines and medium of communicating the information

by the institution on its governance structure, risk profile, risk management framework and the capital adequacy position. The

disclosures comprise detailed qualitative and quantitative information. The purpose of the Pillar III disclosure requirements is to

complement the first two Pillars and enabling stakeholders and market participants in getting an insight in the institution’s risk

appetite and risk exposures and enable detailed assessment and comparability between different banks.

Under the current requirements of the PD module, partial disclosure consisting mainly of quantitative analysis is required during

half year reporting, whereas full disclosure is required to coincide with the financial year-end reporting.

3 Overall risk management

3.1 Risk management strategy

The Bank perceives good risk management capabilities to be the foundation for delivering superior results on a risk-adjusted

basis to customers, investors and shareholders. The Bank will continue to endeavour to adopt international best practices of risk

management, superior corporate governance and the highest level of market discipline.

Introduction (continued)


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

•ManagerisksinherentintheBank’sactivitiesinlinewiththeriskappetiteoftheBank;

•StrengthentheBank’sriskmanagementpracticestoreflectindustrybestpractices;and

•Aligninternalcapitalrequirementswithriskmateriality.

The risk appetite 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 guidelines. By defining the risk appetite, the Bank links its individual risks to

its strategy. The risk appetite defines the level of risk that the Bank 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 also assesses 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 Audit and 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 (RMD) is empowered to independently identify and assess risks that may arise

from the Bank’s investing, financing and operating activities; as well as recommend directly to the Management Risk Committee

(MRC) any prevention and mitigation measures as it deems fit. In addition, the Internal Audit function, which is independent of

both operations and the Bank’s investments units, reviews the risk management process.

3.3 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 including concentration risk, counterparty credit risk and settlement 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

The details on exposure of the Bank to these risks and the management framework for them are discussed in the following

sections 5-12 of this document.

4 Capital structure, management and capital adequacy

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.


The Bank’s investments in commercial entities, below the level of qualifying holding, is risk weighted in accordance with applicable

capital computation guidelines of the CBB. Mena Drill Investment Company which is a qualifying holding is consolidated for

regulatory capital adequacy purpose.

Entity name Entity classificationas per PCD Module

Treatment for accounting purposes

Treatment for regulatory purposes

Al Dur Energy Investment Company (ADEIC) - 58.83%

Commercial entity Consolidated Deconsolidated/ Risk weighted

Cosmos Industrial Investment Corporation BSC (c) (CIIC) – 93.47%


North Africa Investment Company – 100%


MENAdrill Investment Company - 59.44% Commercial entity Consolidated Consolidated*

First Energy Oman – 100% Commercial entity Consolidated Deconsolidated/ Risk weighted

FEB-Novus Aircraft Holding Company – 98.5%


* Based on the instruction from the CBB

The Bank conducted two new transactions in 2012; one is an equity investment for the purchase of an aircraft for Malaysian

Airlines while the other represents an equity stake of 15% in an Islamic retail bank in Oman. Both transactions were conducted

via SPVs: FEB-Novus Aircraft Holding Company and First Energy Oman respectively. Further, both are in line with CBB regulations

and internal Bank guidelines regarding new exposures.

4.2 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 optimize returns within the

internally defined risk tolerances while satisfying all the regulatory requirements.

The Bank ensures that the regulatory capital adequacy requirements are met and complied with at all times.

In addition, the Bank has developed a comprehensive, best of breed ICAAP.

4.2.1 Regulatory capital adequacy

The Bank’s regulator (CBB) sets and monitors capital requirements for the Bank. CBB requires the Bank to maintain the ratio

of eligible capital base to the total risk-weighted assets at a minimum of 12%.

Capital structure, management and capital adequacy (continued)


The Bank does not have banking and financial institution subsidiaries or interest in insurance entities..

The Bank has been in compliance with the minimum capital adequacy ratios prescribed by the CBB during the year ended

31 December, 2012.

The Bank’s Tier 1 and total capital adequacy ratios comply with the minimum capital requirements under the CBB’s Basel II

framework.

The Bank’s total risk weighted exposures as at 31 December 2012 amounted to US$ 805,318 thousand. Credit risk accounted

for 84.64 per cent, operational risk 7.57 per cent, and market risk 7.79 per cent of the total risk weighted assets. Tier 1 and

total regulatory capital were US$ 731,377 thousand.

As at 31st December 2012, Bank’s Tier 1 and total capital adequacy ratios were same at 90.82 per cent.

There are no restrictions on the transfer of funds or regulatory capital within the Group.

4.2.1.1 Regulatory capital structure

The following table summarises the eligible capital after deductions for Capital Adequacy Ratio (CAR) calculation as of

31 December 2012:

USD 000’s

Tier 1 Total

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

Statutory reserve 4,784 4,784

Retained earnings 12,393 12,393

Less regulatory deduction : Excess amount over maximum permitted large exposure limit (285,800) (285,800)

Total eligible capital base 731,377 731,377

The Bank does not maintain Tier 2 capital as of 31 December 2012.

The Bank has not included non-controlling interest in Tier 1 capital as all subsidiaries are commercial entities except

MENAdrill Investment company which in line with the CBB instructions is consolidated and it’s non controlling interest is

not included in Tier 1 capital.

4.2.1.2 Regulatory capital requirement

The following table summarises the regulatory capital requirements for credit, market and operational risks as of 31

December 2012:

USD 000’s

Risk weighted exposure Capital requirement @ 12%

Credit Risk 681,640 81,797

Market risk 62,754 7,530

Operational 60,924 7,311

Total 805,318 96,638


4.2.2 Internal capital adequacy assessment process

In line with the guidelines provided under the Pillar II of the Basel II Accord, the Bank has established the ICAAP to augment

the regulatory capital adequacy. The ICAAP considers the adequacy of capital with respect to the internal capital adequacy

ratio target and includes other material risks apart from those prescribed under the regulatory Pillar I guidelines, stressed

scenarios and growth in business based on the business plan. The Bank segregates all material risks into measurable and non-

measurable risks and has established measurement methodologies for all material risks and quantifies the capital requirement

for them. Currently, the Bank maintains an additional capital buffer of 2% for the non-measurable risks. As of 31 December

2012, the internal capital adequacy ratio was above the internal target.

4.3 Exposures exceeding 15% capital base

As defined in the PCD Module of the CBB, the Bank is obligated to deduct from its capital base any exposures exceeding the single

obligor limit imposed by the CBB which is 15% of the Bank’s regulatory capital base.

The following table summarises the exposures deducted from the capital base for calculating the eligible capital base as of 31

December 2012:

USD 000’s

Exposure type Total Exposure Exposure as percentageof available capital

Capital deductionamount

Equity and financing exposure in an associate 319,510 31.4 % 166,933

5 Credit risk

Credit risk is defined as the potential risk 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 by way of its short term liquidity related placements with other financial institutions, Islamic financing facilities provided to associates, and in respect of investments in projects, unlisted equity and sukuk. 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, however the majority of such investments are asset based.

RMD is responsible for conducting independent risk review and analysis for all credit and investment applications received from Investment Banking, Islamic Finance, Capital Markets and Treasury Departments. It is also responsible for the ongoing review of the credit worthiness of existing clients through the process of periodic credit reviews, annual or more frequently, if required. RMD is also responsible for monitoring all approved limits, and reporting breaches, if any to the MRC, Board Audit and Risk Committee and the Board as appropriate.

RMD reviews every Credit Application received from the respective business initiator (LOB) and prepares an independent comprehensive Credit Risk Analysis with recommendations. The Credit Application and the Credit Analysis are submitted to the MRC for approval, if within their approval authority, or for review and further submission to the appropriate approval authority.

After the credit is approved and draw down effected, the credit exposures are monitored on an ongoing basis. These include keeping track of counterparties’ compliance with credit terms, identifying early signs of irregularity, conducting periodic valuation of collateral, if applicable, and monitoring timely repayments. All the exposures are reviewed at least once annually and interim reviews are conducted in case of any adverse developments.

Capital structure, management and capital adequacy (continued)


RMD assesses the creditworthiness of the counterparties using rating models as a part of the review for new facilities as well as existing facilities undergoing the annual review process. The Bank has implemented industry specific rating models based on key factors relevant to the industry. These models are used to rate its exposures to financial institutions and also for counterparties in various other industries except in case of counterparties rated externally by at least two rating agencies recognised by the CBB. The Bank rates the exposures on a scale of 1 to 10 mapped to the following categories – 1 is mapped to Prime, 2 to High grade, 3 to Upper medium grade, 4 to Lower medium grade, 5 to Non-investment grade speculative, 6 to Highly speculative, 7 to Substantial risk, 8 to Extremely speculative, 9 to In default with little prospect of recovery and 10 to In default with no prospect of recovery (Loss). The Bank currently is not engaged in providing retail credit facilities and hence it does not use any retail credit “scoring” models.

The Bank maintains a strong focus on identification of signs of deterioration in the credit worthiness of counterparties and performance of investments in order to take preventive measures before an existing facility becomes substandard / doubtful or deteriorates in value.

RMD also monitors credit and investment risk exposures against established limits on a daily basis. RMD alerts the concerned business line and the MRC whenever a limit is breached. RMD also produces periodic exposure and risk reports for the Board as well as reports required for regulatory reporting and public disclosure as required under the Pillar III guidelines.

The credit categorisation of the Bank including problem credit categories is aligned with the regulatory categorisation. All credit exposures which are regular and for which currently there is no doubt as to their orderly liquidation will be categorised as Standard or Current.

There are three categories of problem credit exposure classification indicating increasing degrees of potential risk of loss in addition to watch-listing.

Substandard

An obligation or part of an obligation that is inadequately protracted by the current financial condition of the obligor or the

collateral pledged. The normal repayment of principal and profit or settlement at maturity may be or has been jeopardised or

collateral coverage is clearly deficient. No loss is foreseen but a protracted work-out is a possibility.

Substandard accounts may exhibit one or all of the following characteristics:

•Principalorprofitrepaymentispastdueformorethan90days;

•Cash-flowisnotsufficienttomeetcurrentlymaturingfinancingfacility;

•Accountswhichcarrymorethananormaldegreeofriskduetotheabsenceofupdatedorsatisfactoryfinancialinformation

or inadequate collateral documentation.

Doubtful

An obligation or part of an obligation where there is a high probability of some loss, the extent which cannot be currently

quantified.

Doubtful accounts may exhibit one or all of the following characteristics:

•Principalorprofitrepaymentispastdueformorethan180days;

•Collectioninfullonthebasisofcurrentlyexistingfacts,conditionsandvaluesishighlyquestionableandimprobable;

•LikelihoodoflossishighbutdecisiontoclassifyasLosshasbeendeferredtillanexactdecisionisdetermined.


Loss

An obligation regarded as uncollectable and where loss and consequent write-off is imminent. Once written off these amounts are no longer shown as exposure although eventual recovery may still be a possibility.

Loss accounts may exhibit one or all of the following characteristics:

• Principalorprofitrepaymentispastdueformorethanayear;

• Immediatecircumstancesindicatethatanassetisuncollectable.

The Bank regularly assesses its credit portfolio for any indicators of impairment on a periodic basis and would consider provision for impairment on specific credit exposures. The Bank has started making collective impairment since March 2012. The total value of the collective provision was US$ 4,077 thousand as of 31 December 2012.

The Bank shall write-off the exposures (fully / partially as the case may be) when there is reasonable doubt over recovery of the amount. Reasonable doubt shall be based on objective evidence that the balance is impaired and would not be recovered.

The Bank defines its past due credits as any amount due to FEB and not received. Principal or profit repayments that are past due for more than 90 days are classified as substandard.

The Bank considers an Islamic Financing contract as impaired in case it observes certain objective evidence of impairment which might include;

• Thesignificantfinancialdifficultyresultinginlackofabilityoftheborrower;

• Abreachofcontractsuchasadefaultordelinquencyinpaymentofprofitorprincipal;

• Lackofwillingnessorintentoftheborrower;

• Thelender,foreconomicorlegalreasonsrelatingtotheborrower’sfinancialdifficulty,grantingtotheborrowera concession that the lender would not otherwise consider;

• Itbecomingprobablethattheborrowerwillenterbankruptcyorotherfinancialreorganization;

• Thedisappearanceofanactivemarketbecauseoffinancialdifficulties;

• Observabledataindicatingthatthereisameasurabledecreaseintheestimatedfuturecashflowsfromagroupoffinancial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the group including: adverse changes in the payment status of the borrowers, or national or local economic conditions that correlate with defaults on the assets in the group.

During the year, the Bank did not restructure any of its credit facilities and has not made any specific provision on any of its credit or investment exposures due to impairment or restructuring. The Bank has not made any write-off in respect of any business related investments or receivables during the year.

The total unfunded commitments of the Bank as of 31 December 2012 were US$ 77,968 thousand and mainly within the GCC region and primarily in the Energy sector.

The Bank did not have any exposure to highly leverage and other high risk counterparties as at 31 December, 2012. As on the reporting date, the Bank does not have any obligation with respect to recourse transaction. The Bank has also not imposed any

penalties on customers for default during the year.

5.2 Capital requirements for credit risk

The Bank uses the Standardised Approach under the Basel II framework for measuring the regulatory capital requirement for its

credit risk. The Bank utilizes ratings from External Credit Assessment Institution (ECAI) recognised by the CBB (S&P, Moody’s,

Fitch, and Capital Intelligence) for its regulatory credit risk capital charge calculations. Please refer to note 29 of the consolidated

financial statements for details of the credit grading of exposures based on rating by ECAIs as at 31 December 2012.

Credit risk (continued)


5.2.1 Credit exposure and risk-weighted assets

The following table summarises the components of credit risk as computed for regulatory capital adequacy purposes “net of

the relevant deductions” as of 31 December 2012:

USD 000’s

Asset categories for credit riskCredit

exposuresAverage risk

weights %Credit risk

weighted assets

Capital requirements

@12%

Cash items 8 0% - -

Total claims on sovereigns:Sukuk 129,094 1.6% 2,071 248

Total claims on multilateral development banks:Sukuk 22,398 0% - -

Total claims on banks:Standard Risk WeightsPreferential Risk Weights

368,55146,137

48.8%20.0%

180,0009,227

21,6001,107

Claims on corporate 249,177 100% 249,177 29,901

Investment in Equity 121,123 150% 181,684 21,802

Holding of real estate:Land Equity

9,20020,000

100.0%200.0%

9,20040,000

1,1044,800

Other assets and specialized financing 10,283 100.0% 10,283 1,234

Total credit risk weighted asset 975,911 69.8% 681,642 81,796

5.2.2 Capital requirements by type of Islamic financing contract

The following table summarises the components of credit risk by type of Islamic financing contract as of 31 December 2012:

USD 000’s

Asset categories for credit risk by Islamic financing contract types

Creditexposures

Average riskweights %

Credit riskweighted assets

Capitalrequirements

@ 12%

Financing receivables 28,756 100% 28,756 3,451

Due from financial institution 158,403 32.4% 51,346 6,162

Sukuk 392,967 34% 133,489 16,019

Total Credit Risk Weighted Assets by type of Islamic financing contracts 580,126 36.8% 213,591 25,632


5.2.3 Gross funded and unfunded exposure

The following table summarises the total average gross credit exposure over the year and gross credit exposure at 31

December 2012 broken down by major types of credit exposures into funded and unfunded

USD 000’s

Average Gross Credit Exposures * Gross Credit Exposures

Balances with banks 13,116 15,644

Due from financial institutions 228,360 158,403

Investment securities 417,213 472,182

Other assets 75,746 81,142

Total funded exposures 734,554 727,371

Forward treasury commitments 8,087 9,602

Total unfunded exposures 8,087 9,602

* Represents quarterly average balance for the year ended on 31 December 2012.

5.2.4 Impairment Provisioning

During the year, the Bank has not made any specific provision on any of its credit or investment exposures.

The following table shows the movement in provision for impairment during the year.

USD 000’s

Specific Provision General Provision

At 1 January 2012 33,794 -

Charge for the year - 4,077

At 31 December 2012 33,794 4,077

The following table shows the break down of general and specific provision by segmental geographical area:

USD 000’s

Categories Specific provision General provision

MENA 33,794 3,339

Europe - 283

Asia - 455

Total 33,794 4,077

The bank sets aside a general provision for potential losses that may occur as a result of currently unidentifiable risks in

relation to its exposures. Typically, the Bank will make a general provision for performing exposures i.e. internal ratings 1 to

7 corresponding to CBB’s classification of Standard and Watch list exposures, and for the portion of non-performing credit

facilities not covered by specific provisions. The amount of general provision is a percentage of the net book value of all

exposures taking into account certain exemptions. The actual percentage shall be not less than 1% of qualifying exposures

and shall be reviewed and approved annually by the BoD based on conditions prevailing on that date.



5.2.5 Equity investments held in banking book

All the equity investments of the Bank are held in the banking book and are subject to credit risk weighting under the capital

adequacy framework. For regulatory capital computation purpose, the Bank’s equity investments in the banking book include

investments carried at fair value through equity.

There were no sales or liquidations of equity investment during the reporting year which would result in realized gains (or

losses) in this year.

The following table summarises a breakdown of the Bank’s equity investments by objectives and market type as at 31

December 2012.

USD 000’s

Objective Type Gross

exposureAverage

gross exposure Risk

weight %Risk

weighted exposure Capital

requirement

Capital gain Unquoted 20,000 20,000 200% 40,000 4,800

Strategic* Unquoted 177,844 176,206 150% 264,309 31,717

* This does not include equity exposure of Menadrill Investment Co. of US$ 109,759 thousand due its consolidation for capital adequacy

computation purpose.

The Bank does not have any exposure to equity based financing structure.

5.3 Other quantitative information on credit risk

For information related to maturity profile of financial assets, refer to note 29 (a) of the consolidated financial statements.

5.4 Concentration Risk

Concentration risk is the risk of insufficient diversification of the portfolio resulting in adverse impact of an external event on portfolio constituents sensitive to similar risk factors. Concentration risk in portfolios primarily arises due to name, product, sector and geographic concentration.

The Bank adheres to the regulatory guidelines in respect of large exposures and connected and related counterparty exposures to effectively manage the name concentration. Any excess above the said limit has been reported to the CBB and treated in accordance with the regulatory guidelines in respect of capital deduction for such exposures. In addition, the Bank has established internal limits on the maximum permissible exposure to business lines / activities, sectors and countries for managing concentration risk. The portfolio is segregated by business line / activities, geography and industry segments. The activities are segregated as Treasury, Islamic Financing and Investments and the Bank has internal limits for these activities. In addition to the business line limits, the Bank segregates all its exposures by country, sets rating-based country limits and monitors the exposures with respect to these limits. The portfolio is also segregated by industry sectors namely Financial Services, Oil & Gas, Power & Water, Manufacturing & Others with limits set and monitored for these sectors. RMD monitors adherence to the limits on an ongoing basis.

The industry and geography-wise concentration of credit exposure has been detailed in note 29 (b) of the consolidated financial statements for the year ended 31 December 2012. The Group allocates exposures to a particular geographical area based on the risk domicile concept, which could be either the location of the asset or on the location of the counterparty.

5.5 Counterparty credit risk

Counterparty Credit Risk (CCR) is the risk that the counterparty to a transaction could default before the final settlement of the transaction’s cash flows. An economic loss would occur if the transaction or portfolio of transactions with the counterparty has a positive economic value at the time of settlement and the counterparty is in default. The Bank does not have positions in OTC derivatives, Securities Financing Transactions (SFTs), Margin Lending Transactions or any other long settlement transactions which would expose it to counterparty credit risk.


5.6 Settlement risk

Settlement risk is the risk that a counterparty does not deliver on its obligation or its value in cash as per agreement when the

trade was entered though the other counterparty or counterparties have already delivered their obligation as agreed. The Bank

is exposed to settlement risk occasionally on account of the foreign exchange spot transaction entered into for business and

operational requirements. The Bank has established limit structure based on the credit quality (assessed based on credit rating)

for settlement exposures and the limits are monitored on an ongoing basis.

The Bank uses an IT enabled limit monitoring system for online monitoring of credit and settlement limits of counterparties. The

system assists insetting and monitoring of limits by tenor, facilities, counterparties, group of related counterparties, products,

sectors and countries. The system also enables monitoring limit end dates and review dates for facilities.

6 Market risk

Market risk is the risk that changes in market prices, such as profit rates, equity prices, foreign exchange rates and commodity prices

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 uses the Standardized approach under the Basel II Framework for measuring the regulatory capital required for its market

risk exposure.

The Bank does not maintain a trading portfolio in commodities, equities or Sukuk. Therefore, exposure to market risk remained

minimal. As at 31 December 2012, the Bank’s major source of market risk was from Foreign Exchange open position which resulted in

a capital charge of US$ 7,523 thousand. The Bank is also exposed to foreign exchange translation risk from its investment in foreign

operations (associate in Libya).

The different types of market risks with exposures, objectives, policies and processes to manage the risk have been detailed in note

29 (c), of the consolidated financial statement for the year ended 31 December 2012.

6.1 Capital requirements for market risk

Foreign exchange risk charge is computed based on 8% of overall net open foreign currency position of the Bank and is risk

weighted by multiplying with a multiple of 12.5 times.

USD 000’s

Risk weighted exposure (RWE)

Capital requirement @ 12%

Maximum RWE during the year

Minimum RWE during the year

Foreign exchange risk 62,754 7,530 78,355 62,633

6.2 Foreign Currency Translation Risk

The Bank is also exposed to foreign exchange translation risk from its investment in foreign operations (associate in Libya) which

is currently un-hedged.



7 Operational riskOperational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or loss resulting from external events. Operational risk also includes Legal and Sharia’a non-compliance risk but excludes strategic and reputational risks.

Currently, the Bank conducts its business from a single location and in accordance to well-defined processes and procedures. These processes and procedures include a number of internal controls, including segregation of duties to avoid conflict of interest and other internal checks, which are designed to prevent either inadvertent staff errors or malfeasance prior to the release of a transaction. The critical data from the SWIFT system used by Operations Department is replicated online. Data for other key departments namely Human Resources, Treasury and Financial Control is replicated at the end of the working day on the disaster recovery site. The Bank has successfully tested three scenarios namely accessing the live systems in the head office in Bahrain Financial Harbour remotely from the business continuity center, accessing data in the disaster recovery site from head office and lastly accessing systems remotely from laptops using Citrix clients with 2 way authentication.

7.1 Operational risk management

The Bank developed and implemented all relevant operational risk management policies and procedures by end of 2010. The Bank periodically conducts Risk and Control Self Assessment (RCSA) of Operational Risk in all departments to identify the Key Risk Indicators (KRIs) as a part of the overall Operational Risk Management framework. The last round of RCSAs were conducted during the second quarter of 2012 using the IT enabled operational risk system purchased in 2011. Loss data collection and key risk indicator reporting are also performed through the system. The Bank monitors the key risks and operational risk losses on an ongoing basis and regularly reports the position to the senior management and the Board.

7.2 Legal compliance and litigation

As on the reporting date, the Bank had 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 has 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. During the year, no non-Sharia’a compliant income was generated and no instances of Sharia’a violations were identified.

7.4 Capital requirements for operational risk

The Bank uses the Basic Indicator Approach to calculate the operational risk capital 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 12.5 times is used to arrive at the risk weighted assets that are subject to capital charge.

The regulatory operational risk capital charge as of 31 December 2012 is as follows:

USD 000’s

Average gross income Risk weighted exposure Capital charge at 12%

Operational risk 32,493 60,924 7,311


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 for 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 to ensure that the same is within the regulatory and internal liquidity gap limits approved by

the Board and any material change in the Bank’s current or prospective liquidity position is notified to the Board through respective

management and Board committees. The Board has also approved limits on the liquidity ratios and adherence to these limits is overseen

by the management and also reported to the Board Audit and Risk Committee.

The following are the key liquidity ratios which reflect the liquidity position of the Bank as 31 December:

Ratios 2012

1 Liquid Assets to Total Assets (%) 40.5%

2 Short-term Assets / Short-term Liabilities 2.2x

3 Inter Bank Placements to Inter Bank Borrowings 2.7x

4 Gearing Ratio (Long Term Liabilities / Total Assets) (%) 8.4%

8.1 Maturity profile

Refer to note 29 (a) of the consolidated financial statements.

9 Profit rate risk in the banking book

Profit rate risk in banking book is the exposure of the Bank’s financial condition to adverse movements in profit rates. Changes in profit

rates affect the Bank’s earnings by changing its net profit income and the level of other profit rate sensitive income and operating

expenses. Changes in profit rates also affect the underlying value of the Bank’s assets, liabilities, and off-balance-sheet instruments

because of the absolute or economic value changes of future cash flows due to the change in profit rates. Profit rate risk primarily

arises on account of repricing risk, yield curve risk, basis risk and optionality risk.

The MRC is responsible for recommending the profit rate policy, setting limits and guidelines.

The Bank has minimal exposure to repricing and yield curve risks. Repricing risk arises on account of mismatch in profit rate fixation

periods between assets and liabilities. Yield curve risk arises due to shift in yield curve resulting in change in the economic value of

cashflows. Exposure to basis risk is not material and though the basis risk exposure is monitored, the Bank does not consider this item

of profit rate risk in the internal risk calculations. The rate sensitive assets mainly comprise short-term interbank placements and

Sukuk. A part of these placements are funded by rate sensitive liabilities in the form of short-term interbank deposits. The short-term

nature of these items and high degree of correlation between profits earned and paid on them minimises the basis risk. The balance

rate sensitive assets (Sukuks and residual inter-bank placements) are funded by equity. The Bank is not exposed to optionality risk

arising due to embedded options in rate sensitive assets or liabilities.


The Bank’s profit rate sensitive assets comprise placements with financial institutions, Sukuk investments and Islamic Financing Facilities. On the liabilities side, the Bank’s profit bearing liabilities includes mainly placements from central banks and other financial institutions. The Board has approved limits on profit rate sensitivity in each time bucket. Profit rate risk is managed principally through regular monitoring of the profit rate gaps against the Board approved limit in each bucket.

The Bank ensures that shift in profit rates does not result in the overall economic value based on the re-pricing gaps to exceed the limits set on the economic value of equity. This is assessed based on the impact of a parallel shift in the yield curve on the expected Net Profit Income for up to one year horizon and the economic value of Bank’s equity on a regular basis. The overall impact on the economic value of equity for a 200 bps shock is within the internal limit as well as the limit prescribed by the Basel Committee on Banking Supervision.

The management of profit rate risk against profit rate gap limits is supplemented by monitoring the sensitivity of the Group’s financial assets and liabilities to various standard and non-standard profit rate scenarios. Standard scenarios that are considered on a monthly basis include a 200 basis point (bp) parallel fall or rise in yield curve. Refer to note 29(d) of consolidated financial statement for a detailed profit rate gap position of the bank as of 31 December 2012.

The impact is reported as a percentage of the Bank’s capital and was within the limit of 20% set by the Basel Committee (for a standard shock of 200 basis points). Overall, profit rate risk positions are managed by ALCO by using placements from / to financial

institutions to manage the overall position arising from the Group’s activities.

10 Reputational riskReputational 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. 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 2012, the Bank was not exposed to any significant reputational risk. The Bank has developed adequate policies and procedures to identify, monitor and address all potential risks that may arise from all such activities.

The Bank considers complaints from all investors/customers seriously. These can adversely affect the Bank’s reputation and if it is left unattended these can also lead to litigation and possible censure by the regulatory authorities. Bank has a formal process of handling complaints from investors/customers, in line with the CBB’s requirements. Accordingly, the Bank also appointed a Customer Complaints

Officer in 2012.

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. The Bank has developed

adequate policies and procedures to identify, monitor and address strategic risk which were duly approved by the Board.

12 Other risks

Other risks include fiduciary risks, displaced commercial risk and regulatory compliance risk etc. which are inherent in all business and not

easily measurable or quantifiable. The Bank currently does not have funding from equity of investment account holders and off balance

sheet equity of investment account holders and hence is not exposed to fiduciary or displaced commercial risk. The Bank as a matter

of policy prepares its business plan in consultation with the Board to incorporate the shareholders expectations and regularly reviews

and monitors financial and marketing strategies, business performance with respect to the business plan, new legal and regulatory

developments and their potential impact on the Bank’s business and corporate governance practices to ensure avoidance of any

regulatory non-compliance.


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

Bahrain Financial Harbour, East Tower (5th & 6th Floor)

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

Tel +973 17170000 Fax +973 17170170

www.1stenergybank.com

Documents

ANNUAL REPORT 2012 · Mr. Al Jabr holds a Master Degree in BA from The University of Leicester - UK. He graduated as Electrical Engineer from King Fahd University of Petroleum and