BURGAN BANK ENGLISH PROFILE

IN MEMORIAM

H.H. Sheikh Jaber Al-AhmadAl Jaber Al Sabah

Amir of the State of Kuwait1928-2006

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CONTENTS

06 Mission Statement 18 Board of Directors 26 The Bank’s General Management08 Company Profile 19 Corporate Governance Report 30 Management Review of the Year10 Financial Highlights 24 Executive Management 40 Disclosures for the 2005 Full Year12 Chairman’s Statement

Burgan Bank, P O Box 5389, Safat 12170, Kuwait

Tel. +965 298 8000, Fax +965 298 8502 / 246 1148, www.burgan.com

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H.H. Sheikh Nawaf Al-AhmadAl-Jaber Al-Sabah

Crown Prince of the State of Kuwait

H.H. Sheikh Sabah Al-AhmadAl Jaber Al-Sabah

Amir of the State of Kuwait

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A MEMBER OF KIPCO GROUP

KIPCO combines the very best products and service, crafting them into a localpackage with truly international standards – all the while remaining faithful toour heritage and values.

The individual companies contained within the Group all have differentfunctions and capabilities, but together they are united in a single purpose;the advancement of our region and a better quality of life for all.

Kuwait Projects Company – KIPCO – is one of the leading diversified operatingholding companies in the Middle East and North Africa, with more than $15billion under management or control.

KIPCO has substantial ownership interests in a portfolio of 55 companiesoperating throughout the region and internationally in two major businesssectors: Financial Services and Media & Telecommunications. Subsidiaries andaffiliates of KIPCO companies with interests in Real Estate and Industry arecontained in a sub-sector of Financial Services and other subsidiaries andaffiliates are contained in the Management and Advisory sector.

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FINANCIAL SERVICESKIPCO’s holdings in financial services include investments in commercial banks, investment banks, assetmanagement companies, and insurance companies. These institutions meet the needs of individual andcorporate customers by developing innovative products, maintaining service excellence and harnessingtechnology to broaden distribution channels.

REAL ESTATEKIPCO Group companies are involved in the development and management of properties in the MENAregion. These companies are focused on developing landmark properties, primarily in the retail, officeand hospitality sectors. The selection of real estate investments is based on the identification of qualityproperties that provide attractive return potential.

INDUSTRYWith a view to assisting local governments in developing the industrial infrastructure of the region,KIPCO has invested in key foodstuff and industrial sectors such dairy, food services, fisheries andindustrial coatings. These companies have progressively contributed to the region achieving selfsufficiency in these sectors.

MEDIA & TELECOMMUNICATIONSThe rapid convergence of telecommunications, information technology and media has created numerousopportunities for providing commercial, educational and entertainment services in the region. With itsportfolio of investments in mobile telecommunications, Pay-TV and Internet service companies, KIPCO iswell positioned to capitalise on these opportunities. KIPCO’s investments in the Media andTelecommunications sectors help people connect with each other using quality, cost effective services.

MANAGEMENT & ADVISORYKIPCO provides management and advisory services through its strategically located operations in the U.S.,U.K. and India. They provide a range of services, including corporate advisory, direct investments, privateplacement, derivatives and corporate restructuring, to KIPCO Group companies and external entities.The sector also comprises investments in growing service industries such as healthcare.

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MISSION STATEMENT

BURGAN BANK SAK ANNUAL REPORT 2005

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Our VisionTo be the best financial services provider with the most efficient distribution channels.

Our Mission StatementBurgan Bank is your financial partner, forming a relationship with you based on integrity andtrust, providing innovative banking services that understand and support your different needsat every stage of life

Our GoalsTo maximize shareholder value, deliver service and product excellence to customers and play acaring role in the societies we serve.

All Employees will be encouraged to be sincere, loyal and to achieve their true potential withsuperior training, technology and opportunity.

Our Motto“Driven by challenge”

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COMPANY PROFILE


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Burgan Bank, established as a public shareholding company in 1977, is the youngestcommercial bank in the state of Kuwait and now the country’s fourth largest bank with assets of KD 2.24 billion (US$ 6.52 billion).

1997 was a turning point for Burgan Bank when ownership was dramatically changed in a privatization process. KIPCO, the largest holding company in Kuwait, is now Burgan Bank’smajor shareholder,The change in ownership structure paved the way for a natural progressionin strategic, focus and management style. Within this framework, the Bank underwent afundamental re-engineering process.

Burgan Bank now offers a full range of banking services focused on both retail and corporateclients. The Bank has also directed part of its resources to the international markets, takingadvantage of attractive investment opportunities to solidify its presence in these markets. Itsprivate banking operation provides an international portfolio of wealth management services.

Through a strategic distribution network in Kuwait comprising of 19 branches, Burgan Bankhas pioneered innovative electronic and automated banking, and offers its customers a rangeof popular services including : www.beebank.com, Kuwait’s most professional internet bankingsite; Burgan Direct 804080, its round-the-clock Call Center; B24 Self-Service Branches, thefirst fully-automated branches in Kuwait; electronic payment gateways, B- Everywhere, themobile ATM service, a first for Kuwait and the Middle East; and BSMS, Kuwait’s first interactiveSMS-based account information service.

Burgan Bank is committed to developing in-house corporate governance and it is amonst thefirst regional banks to publicly detail these policies and procedures in its Annual Report.

Burgan Bank has achieved its leading role in the retail, corporate, private and investmentbanking sector through its innovative product offering and advanced technology deliverychannels. Burgan Bank’s sustained improvement in performance over the years is supported bydiversified revenue structure, good asset quality, diversified funding sources and strong capitalbase. State of the art service and pioneering technology utilization has positioned the bank as atrendsetter in the domestic market.

Burgan Bank’s vision is encapsulated in endeavoring to be Kuwait’s premier financial serviceprovider with the most efficient distribution channels, and to enhance overall customer servicein line with its corporate slogan: “Driven By Challenge”. Burgan Bank is actively raising bankingstandards in the State of Kuwait.

COMPANY PROFILE

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FINANCIAL HIGHLIGHTS


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Income StatementThe net profit attributable to shareholders, after provisions, was KD 42,384 million for 2005compared to KD 29,596 million for 2004, a remarkable increase of 43 per cent. Net interestincome for 2005 was KD 43,177 million, up by 32 per cent compared to KD 32,769 million for2004. These results were a clear signal of the Bank’s success based on projections made by theExecutive Management during the “Investor Presentation” held during June 2005 at theShafafiyah KIPCO Forum.

Earnings per share increased to 51.9 fils, while return on shareholders’ equity increased by animpressive 39 per cent to reach 19.2 per cent.

Loans loss provision for the year was KD 4,076 million on prudence measurement. The Bankcontinues to be in full compliance with Central Bank of Kuwait regulations regarding specificprovisions, and the 2 per cent general provisions on regular cash and non-cash credit facilities.

Balance SheetCustomers’ deposits increased notably by KD 118 million compared to the previous year.The Bank made good progress in securing lower cost funding sources and consistentimprovement in asset quality and performance. Customer focus was maintained throughoutthe year in all business sectors, which significantly contributed to a remarkable increase of19 per cent in profit from core banking business.

High-yield consumer loans continued to grow, while low-yield Government Debt Bonds werereduced by KD 50.6 million down to KD 61.6 million, now representing 3.3 per cent of theBank’s total assets (compared to 6.5 per cent for 2004).

The Bank’s capital adequacy ratio of 18.4 per cent as per Basel II requirement continues toexceed by a comfortable margin the minimum requirements of the Central Bank of Kuwait(12 per cent) and the Bank for International Settlements (8 per cent).

In its February 2006 report, Standard & Poor’s rated Burgan Bank’s Financial as BBB+/A-2,reflecting the Bank’s consistent core profitability and comfortable capital levels, with a StableOutlook for the Bank’s position.

The Board of Directors has recommended to the Shareholders’ Annual General Meeting thedistribution of cash dividends of 40 per cent (compared to 25 per cent for 2004). Shareholders’equity as at December 31, 2005 stood at 247.3 million, representing a book value of 305 filsper share for 2005, compared to a market value of 600 fils per share.

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CHAIRMAN’S STATEMENT

Dear Shareholders,

“A YEAR OF OUTSTANDING PROGRESS”

It gives me great pleasure to present to you on behalf of the Board of Directors, the 28thAnnual Report and the closing accounts for Burgan Bank for the financial year ended 31December 2005.

It is my sad duty as Chairman to express (on behalf of the Board, Management andStaff) to the Al-Sabah family, the Government and people of Kuwait our deepestcondolences on the recent death of the late Amir His Highness Sheikh Jaber Al-AhmadAl-Jaber Al-Sabah.

At the same time the Bank is immensely appreciative of the role of His HighnessSheikh Saad Al-Abdullah Al-Salem Al-Sabah as the Amiri Father of the Nation, prayingto Almighty God to support him with all His mercy.

Furthermore the Bank would like to congratulate His Highness Sheikh Sabah Al-AhmadAl-Jaber Al-Sabah, H.H. Sheikh Nawaf Al-Ahmad Al-Jaber Al-Sabah and H.H. SheikhNasser Al-Mohammad Al-Ahmad Al-Sabah on their assumption of their illustriouscapacities of Amir, Crown Prince and Prime Minister respectively. All concerned withthe Bank will be proud to respond to their future guidance and look up to them asexamples of personal and tireless dedication to the future development of the State ofKuwait and the enhancement of the prosperity of its people.


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The year in review may be characterized as a year of outstanding progress for Burgan Bank. Itwas definitely a year of major milestones in which the Bank either achieved or surpassed thegoals the Board of Directors had determined for its business strategy and overall functioning ofthe Bank. Thanks to the sustained collaborative effort and hard work of the Management andStaff under the constant supervision of the Board, very solid results and achievements havebeen the hallmark of the year.

The Board of Directors have focused their attention and efforts in five principal areas, namely,constantly monitoring the mandated implementation progress of the Corporate Governanceframework, preparing the Bank to meet the new regulations for Basle II and accountingtreatment under International Financial Reporting Standards (IFRS), supervising the strengtheningof the balance sheet, insisting on continued improved productivity levels and finally, with aneye to the future, evaluating and determining the Bank’s posture for sustained development.

PROGRESS ON CORPORATE GOVERNANCE IMPLEMENTATION

The Board of Directors was pleased to present to you in the Annual Report of 2004 the outlineof its desired framework for Corporate Governance which would allow Burgan Bank todevelop its franchise while respecting and adhering to best practice in terms of responsibledecision-making with clear cut lines of accountability and transparency. You should know thatBurgan Bank was one of the first banks in the GCC and MENA region to propose such aframework.

I am pleased to report that this major initiative undertaken by the Board of Directors has seencontinued progress in this fundamental area. The proposed framework of 2004, with thediligent contribution of Management and Staff, has been fully tested in all of its aspects andhas now been enshrined as mandated policy for Burgan Bank. The Annual Report 2005contains a detail report on this crucial issue which has dominated much of internationalcorporate developments in the last several years.

The Board of Directors is pleased to announce the full ratification and implementation ofBurgan Bank’s Corporate Governance Framework policy. This major implementation hasallowed the Board of Directors to further strengthen its supervisory role while reinforcing theinternal controls of the Bank. It should be noted that the Board will remain vigilant to ensurethat the Corporate Governance policy is fully reflective on the one hand of the developingneeds of the Bank and, on the other, of the evolving regulatory requirements. Please refer tothe section entitled “Corporate Governance”.

IMPLEMENTATION OF NEW REGULATIONS

The year 2005 will be most likely remembered as a year which saw the advent of tremendouschanges in the regulatory environment. Firstly, the Central Bank of Kuwait mandated importantchanges in the liquidity posture of the banking industry with the introduction of the 80:20ratio, where the portfolio of client loans aggregate amount is a function of the total depositscollected from clients to the above ratio level. Secondly, concerned with the level ofindebtedness in the consumer market, the Central Bank of Kuwait also imposed revised stricterlending limits for consumer loans. Thirdly, it also required all commercial banks in Kuwait toadhere to the Basle II regulations, effective 31 December 2005, in terms of both the capitaladequacy norms described in Pillar I and the required reporting disclosures defined in Pillar III.And lastly, the revised accounting treatments for both balance sheet and profit and loss itemsunder the new requirements of IFRS (International Financial Reporting Standards).

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CHAIRMAN’S STATEMENT con’t

On behalf of the Board of Directors, I am very pleased to announce that Burgan Bank, throughthe diligence of its Management and Staff, is fully prepared to meet these new regulatorychallenges and that the required reporting has been conducted accurately and in a timelyfashion. Thanks to the keen anticipation and diligent hard work of both the Board AuditCommittee and Management, the Bank was in an anticipative posture (helped by the full auditof half yearly results) to comply fully with all of these new requirements in a timely manner onthe accelerated schedule (as compared to any other jurisdiction) prescribed by the Central Bankof Kuwait. In this context I draw your attention to many of these new regulatory aspects whichare described in some detail in this Annual Report and will be a continuing feature of BurganBank’s financial reporting in the years to come.

STRENGTHENING THE BALANCE SHEET

Given the positive economic climate and activity, the Board of Directors has closely workedwith Management to significantly strengthen Burgan Bank’s balance sheet, particularly in lightof the new regulatory environment. Collective attention has been focused on several importantareas crucial to the Bank’s future strong development, namely the capital adequacy ratio;improved asset and liability management and strengthened levels of provisioning coupled tothe reduction of non-performing assets. The capital adequacy ratio has significantly improvedand progressed from Basle I level of 17.8% in 2004 to 18.4% in 2005 Basle II level. Pleasenote that this important ratio does not just measure the level of capital required fixed by theCentral Bank of Kuwait at 12% but is also a reflection of the underlying mix of balance sheetassets and covers market related and operational risks. As may be noted and due to thisBurgan Bank is substantially above the minimum level of the regulatory requirement.


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Asset and liability management has also been reinforced and has yielded correspondingbenefits of a stronger balance sheet in several important aspects. The Bank has definitelyreduced its dependence on intrabank borrowings and has substantially increased its efforts inmobilizing deposits from its client base, with an increase of 11%. This has resulted in veryimproved levels in its liability mix as well as its overall balance sheet liquidity, in both local andforeign currencies. Coupled to this there has been a very prudential positioning of the Bank interms of its asset growth. The consistent focus has been one of on-going risk/rewardevaluation and where asset quality has been the primary driving principle. As may be notedasset growth has been modest at 9% when comparing 2005 levels to those of 2004.

Thanks to very strong risk management posture of Burgan Bank, the vigilance of the BoardCredit Committee for counterparty risks and the Board Executive Committee for market andinvestment risk, the risk profile of the Bank is now very well controlled. In addition, thanks tothe Management’s dedication as well as active scrutiny by the Board Audit Committee, loanprovisioning levels have never been higher and more reinforced, particularly when compared to2003 and 2004 levels.

Moreover, the Board has actively encouraged Management in its recovery efforts and theyear 2005 saw substantial progress in this area. Diligent action has resulted in reducingNon-performing Assets by KD 6.8 Million for 2005 and by KD 4.5 Million in 2004. For thefirst time in the Bank’s recent history collateral held against non-performing loans exceedstheir carrying value as at 31st December 2005.

Due to these consistent and combined efforts by both the Board and the Management, I ampleased to advise you that Burgan Bank’s balance sheet has never been as strong as at the endof December 2005.

CONTINUED IMPROVED PRODUCTIVITY

On behalf of the Board of Directors, I am very pleased to announce the continued and veryimproved productivity of Burgan Bank. Net profit since 2003 has more than doubled toKD 42.4 million, an increase of 43% over 2004 alone. This has translated into earnings pershare of 51.9 fils, a spectacular jump over 2003 and 2004, respectively +119% and +49%.

These results are due in large measure to the Bank’s success in significantly improving both thenet interest income and the non-interest income levels. Net Revenues have risen by a verysubstantial by 28% and 27% over 2004 and 2003 respectively. Additionally, thanks to veryprudent management of costs and despite the development posture of the Bank, the cost toincome ratio has also shown steady downward progress from 34.8% in 2003 and 32.4% in2004 to 29.8% in 2005. Finally, the very improved net margin contribution has added to asustained progression in ROA for 2005 at 2.5% compared to 1.6% in 2004 and 1.1% in2003.

These outstanding results by any measure have been supported by strong business activity in allof the Bank’s business lines and by Staff productivity. For a detail review of the sustainedprogress the Bank has made I would like to refer you to the section on the Annual Reportentitled the “Management Year in Review”. The Management & Staff of the Bank contributedgreatly to the overall improved productivity level and on behalf of the Board of Directors, Iwould especially like to signal their contribution and their willingness to work an additionalhour every day. Average employee revenue increased from KD 103k in 2003 to KD118k in2005. On behalf of the Board of Directors, I am also very pleased to tell you that this combined

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CHAIRMAN’S STATEMENT con’t

effort and level of hard work has resulted in Burgan Bank surpassing its budget for 2005 by12% in net profit, substantially higher than the result committed to and announced byManagement during the “Shafafiyah KIPCO Investor Conference” held in June in Kuwait.

In view of these excellent results, reviewed in the section on Financial Highlights, the Board ofDirectors is recommending a dividend pay out per share of 40 fils, an increase of 60% over 2004.

SUSTAINED DEVELOPMENT – CONFIDENCE IN THE FUTURE

Given the buoyant economic environment, the Bank’s strong posture in Corporate Governance,its preparedness in meeting the regulatory challenges, its strengthened balance sheet and itsconsistency and continued improvement in productivity, the Board of Directors during 2005examined and evaluated two major aspects of its sustained development. First, for the Bankitself, it examined and approved a Long Range Plan up to 2010 presented by the Managementwhich focuses on sustained profitable growth founded on the Bank’s three pillars of strength;its commitment to meeting the needs of its client and delivering on best of breed service levels,leveraging its IT and operational capabilities and nurturing its Staff to meet the challenges ofthe future. This strategic plan seeks to further build Burgan Bank’s brand identity and franchiseas well as further enhancing its business activities and reach while continuing to strengthen itsbalance sheet and productivity with additional rewards for all of the Bank’s stakeholders, itsclients, its shareholders and its Staff.

Second, the Board of Directors believes that Burgan Bank, as a responsible corporate citizen,must also continue to contribute to the sustained development of the community. Toward this


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end, the Board has mandated the full compliance of the Kuwaitization program and whereverpossible to exceed it in terms of both quality and quantity. In this respect, I am pleased toadvise you that the Bank has achieved a ratio of 49.2% in its Kuwaitization requirement atyear end and expects to achieve the required 50% level by the first quarter of 2006. Notcontent with this alone, the Bank will also continue to provide support for both educationaland charitable programs that it has already initiated that seek to enhance and sustain thedevelopment of the community for the greater good of the State of Kuwait.

In conclusion and on behalf of the Board of Directors, I would like to take this opportunity tothank the clients of Burgan Bank, its loyal shareholders, my colleagues on the Board whoactively participated in their various capacities as Board Committee members and finally butespecially the Management and Staff who made the year 2005 an outstanding one.

Lastly, on behalf of the Board of Directors the Bank’s Management and Staff, I would like toextend our gratitude to His Highness The Amir, His Highness The Crown Prince and HisHighness The Prime Minister, for their guidance and encouragement, asking Almighty God tosupport them in leading Kuwait to further progress and prosperity.

We would also like to thank the Central Bank of Kuwait, the Ministry of Commerce & Industry,Kuwait Stock Exchange and other official authorities for their continued support of the Bank.

Mohammed Abdul Aziz Al Jarrah Al SabahChairman

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BOARD OF DIRECTORS

1. Sheikh Mohammed Abdulaziz Al Sabah Chairman of the Board

2. Tariq Mohammed Abdul SalamVice Chairman

3. Sheikh Hamad Sabah Al Ahmad Al SabahBoard Member (not pictured)

4. H.E. Abdul Karim KabaritiBoard Member

5. Saudoun Abdullah Al AliBoard Member

6. Abdul Salam Mohammed Al BaharBoard Member

7. Antony Miles StroverBoard Member

1 2 4

765


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CORPORATE GOVERNANCE REPORT

BACKGROUND & SHAREHOLDERS

Burgan Bank is a Public Shareholding Company incorporated in the State of Kuwait andlisted on the Kuwait Stock Exchange. It is licensed and supervised as a Commercial Bank bythe Central Bank of Kuwait (‘CBK’)

The Directors were aware of the following Shareholders with holdings in excess of 5% of the issuedordinary Share Capital as at 31st December 2005.

• Kuwait Projects Company K.S.C. (Closed) 34%• Wafra International Investment Company K.S.C. 6%• Treasury Shares 6%

INFORMATION RELATING TO DIRECTORS

In April 2004, Board Members were elected by the Shareholders for a term of three years.The present Board Members (who were all elected or re-elected then) are:

Sheikh Mohammed Abdul Aziz Al Jarrah Al Sabah - Chairman of the BoardSheikh Mohammed Al Sabah has a B.A. in Business Administration from the University of Cairo.He has served for many years both in Kuwait and the United Kingdom as a senior official of theKuwait Ministry of Defence. He was elected Deputy Chairman of Burgan Bank in 2001 andChairman in 2003.

Chairman of the Board’s Executive, Credit and Appointments & Remuneration Committees.

Tariq Mohammed Abdul Salam - Deputy ChairmanMr. Abdul Salaam has an Accountancy degree from the University of Kuwait. He now serves asDeputy Chairman of the Kuwait Clearing Company and is also a Board member of United Gulf Bankof Bahrain and Jordan Kuwaiti Bank of Amman.

Member of the Board’s Executive, Credit and Appointments & Remuneration Committees.

Sheikh Hamad Sabah Al Ahmad Al Sabah - Board MemberSheikh Hamad Al Sabah holds a diploma from Storm King of New York State. He currently servesas a Board member of the Kuwait Foundation for the Advancement of Science. He is a BoardMember of the United Gulf Bank, Bahrain and has also served as a Board Member of Jordan andKuwait Bank, Amman.

Member of the Board Audit Committee.

H.E. Abdul Karim Kabariti - Board MemberH.E. Abdul Karim Kabariti holds a Business Administration Degree from Saint Edwards University Texasand a degree in Geology from the American University of Beirut. He has held the offices of Prime Minister of Jordan as well as that of Chief of the Royal Jordanian Court. He now also serves asChairman of Jordan Kuwait Bank.

CORPORATE GOVERNANCE REPORT

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CORPORATE GOVERNANCE REPORT con’t

Abdul Salam Mohammed Al Bahar - Board MemberMr. Al-Bahar has a Bachelor of Science Degree in Engineering from Fairleigh Dickson University NewJersey USA. He currently serves as a Board Member of National Mobile Telecommunications Companyand Al Tamdeen Real Estate Company.

Member of the Board’s Executive, Credit and Appointments & Remuneration Committees.

Saudoun Abdullah Al Ali - Board MemberMr. Al Ali has a Business Administration Degree in Accounting and Finance from Ashland UniversityOhio U.S.A. He now serves as Deputy Chairman of United Medical Services Company. He is also aDirector of Manafae Investment Company.

Chairman of the Board’s Audit Committee. Member of the Board’s Executive, Credit, Appointments,& Remuneration Committees.

Antony Miles Strover - Board MemberMr. Strover is a Fellow of the Institute of Chartered Accountants in England and Wales. He has servedas a Departmental Manager in the London office of Peat Marwick Mitchell & Co and also as an AuditPartner in the Kuwait and Bahrain Offices of that Firm.

Member of the Board’s Audit Committee.


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DEVELOPMENTS IN THE BANK’S ORGANISATION

The Organisation chart reproduced on the opposite page was provisionally approved by the Board inJuly 2004; by the end of 2005 it had been substantially fully implemented. At a March 2006 BoardMeeting this Governance structure Chart, a supporting Corporate Governance Overview Manual and17 supporting volumes of updated Policy or Procedure documentation were approved for use by theBank’s Management and staff.

The principal Areas of the Bank’s activity where review and updating are still in progress relate to IT policy,procedure and IT security; in these specialized areas the Bank has engaged outside consultants and theyare working with the Bank’s own specialists to upgrade and adapt policy and procedure as is now requiredto reflect the Bank’s current range of Client products & Internal processes.

THE ROLE OF BOARD COMMITTEES

The following section sets out in summary form the principal objectives and duties of each PrincipalBoard Committee; in a number of cases the detailed implementation of a Committee Function isdelegated to a sub-committee on either an ad-hoc or ongoing basis.

Board Executive Committee (‘BEXCO’) is responsible for;

- Formulation of Overall Banking & operating Strategy- Evaluation and approval of Risk management policy- Approval of Investment strategy and exposure- Approval of ALCO & Treasury limits- Supervision of Operations policies and appraisal of related risk- Development of Information Technology strategy

Board Credit Committee (‘BCC’) takes decisions on;

- Credit extension over delegated limits- Requirement for Credit security- Credit Policies and Procedures- Form of Credit documentation

This Committee also oversees the sub-committee: Board Recoveries Committee (‘BRC’) which reviewsrecovery strategy for recovery of delinquent credits and takes decisions in important cases.

Board Appointment & Remuneration Committee (‘BARC’) considers;

- Nomination to the Board & Board members remuneration.- Appointment/remuneration/dismissal/ discipline of the CEO and those who report directly either to

him or to the Board/Board Committees.- Proposals for discretionary remuneration not provided by contract.- Human resources policy, scales of remuneration, grading and other procedures.- Remuneration disclosure in the Bank’s Financial Statements.

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CORPORATE GOVERNANCE REPORT con’t

Board Audit Committee (‘BAC’) is entrusted with;

- Reviewing Annual & Quarterly financial statements in respect of material financial judgments and compliance prior to submission to the Board.

- Supervising the Internal Audit department and considering their reports.- Approving appointments to senior Internal Audit posts.- Supervising the relationship with the external auditors and fixing their remuneration.- Reviewing their ongoing independence.- Considering all aspects of Internal Control and approving control procedures.- Considering any alleged frauds or possible control irregularities.

All of the above Committees are guided in their work by detailed charters included in theOverview Volume of the Governance Manual.

SHAREHOLDERS' ASSEMBLY

CHAIRMAN

BOARD

ANTI-MONEY LAUNDERING

BOARD SECRETARIAT

Board Appt. & Remuneration Committee

Board Credit Committee

Board Executive Committee

STRATEGY

RISK

ALCO INV OPS/ITBoard Recovery �Committee

CFO/Planning Legal

OUTSIDE COUNSELCEO

SGM (B) SGM (R) SGM (IB & T) SGM (O)

GSAOperationsITInvestmentTreasuryFin. Inv. �Group

Corp & �InternationalRetailPrivate

CEO: Chief Executive Officer

SGM (B): Senior GM (Banking)

SGM (R): Senior GM (Risk)

SGM (IB & T):Senior GM (Investment Banking & Treasury)

SGM (O): Senior GM (Operations)

SGM (R) supervises Risk Functions

SGM (B)

Colour Key Abbreviations Key

ComplianceCorporate Communication

EXTERNAL AUDIT

Internal Audit

Board Audit Committee

Board: Shareholders, Board Committees and Board related

Outside independent professional Advisors

CEO/ CGM and Central Management staff functions

SGM (O) and Operating Management/ Control Activities

SGM (IB & T) Banking/ Treasury/ Investment activities

Market & Product Dev.

Market Risk

Operations Risk

Credit Risk

Human Resc.

Fin. Acct & Cont

Org. & Methods

CFO: Chief Financial Officer

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GOVERNANCE & ORGANIZATION STRUCTURE CHART

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GENERAL MANAGEMENT

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3 4 5

6


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1 Khalid Fahad Al ZoumanChief Financial OfficerStrategic Financial Planning

2 Jonathan D. LyonChief Executive Officer

3 Simon ClementsSenior General ManagerOperations Group

4 Peter ShermanSenior General ManagerBanking Group

5 Madhusudan RaoSenior General ManagerRisk Management

6 Ziad SarawanSenior General ManagerTreasury & Investment Banking

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THE BANK’S GENERAL MANAGEMENT

Jonathan Lyon Chief Executive OfficerPeter Sherman SGM BankingZiad Sarawan SGM Investment Banking & TreasuryMadhusudan Rao SGM Risk ManagementSimon Clements SGM OperationsKhalid Al-Zouman Chief Financial OfficerRaed Al-Haqhaq GM Corporate BankingGary Mond AGM Retail BankingNader Al-Obaid AGM Private BankingMark Zanelli Head of TreasuryVenkatakrishnan Menon GM OperationsDara Mehta Head of Information TechnologyMaliha Al-Ayar AGM Human ResourcesNicola Adas AGM Organization and MethodsTarek Hamdi AGM Financial Accounting & ControlT.S. Easwaran AGM Head of Credit RiskSatish Mane Head of Operational RiskMohammed S. Sheikh Head of Market Risk ControlEtedal Al-Ayyar AGM Corporate Communications Dept.Mahmoud Ezzat Legal AdvisorMaisaa Al-Luqman Compliance ManagerMuneera Al Mukhaizeem Deputy Chief Internal AuditorMurzban Daruwalla Head of Marketing & Business Development

The following individuals now serve in General Management and other ‘Senior Officer’ keyposts as shown in the ‘Governance Chart’.

Recruitment (or post confirmation) for the remaining key Governance positions is proceeding as fastas is considered appropriate. The CEO now expects to have substantially completed this process bymid 2006.

Management decision taking is exercised through a formal scheme of delegation that has beendocumented in the Overview Volume of the Governance Manual. It is also assisted by a network ofManagement Committees dealing both with general management issues and specialist areas such asCredit, ALCO, Product Pricing, Provisioning, Human Resources, Information Technology & InternalAudit.

Each of the above interacts with the Board Committee(s) charged with oversight of the particularsector(s) mandated to the corresponding Management Committee. Management Committees reachdecisions by consensus—but if a particular member wishes to dissent against a decision, details of theissue are advised to the concerned Board Committee.

ETHICS

The Board of the Bank has resolved that Good Faith, Integrity, Compliance, Quality and Respect mustguide the conduct of Directors and Staff at all times when engaged in the Bank’s business. Theseprinciples apply equally in dealings with Clients, Counterparties, Regulatory Authorities and BusinessColleagues and towards the Bank itself.


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In order to apply these principles in a consistent manner the Board has approved a formal Code ofConduct which all employees are given on engagement, and which requires them to enter into aconfidentiality undertaking.

The basic administrative procedure which the Board of the Bank has adopted to satisfy thefundamental principle of fair dealing is for it to document appropriate formal policies to resolve thefollowing key issues:

• Potential conflicts of interest between the Bank and a Director or ‘Key Executive’ (defined as the CEO or Management staff requiring CBK approval)

• Related party transactions which must be executed on an arms-length terms and disclosed transparently and compliantly to the CBK, KSE and in the Bank’s financial statements in the mannerrequired by each authority.

• Potential abuses derived from Bank Director’s or staff dealing in its shares on the basis of inside information: a set of detailed ‘safeguard’ procedures have been prescribed by the Board that go beyond current Kuwait regulatory requirements.

In summary, the thrust of the Bank’s ethics policy is to avoid both the perception and reality ofconduct or transactions that fail to meet the good faith standards that counterparties are entitled toexpect from a substantial commercial bank in a regulated environment.

RISK MANAGEMENT

The Bank has continued to give considerable emphasis during the year to the development of its riskmanagement practices and procedures. It has been assisted and guided in this respect by the decisionof CBK to require early implementation as at 31st December 2005 of Pillars 1 & 3 of the Basel IIprocess. In order to address the related detailed requirements the Risk Management Team has had thebenefit of extensive consultation with CBK Officials. Two Directors attended the Basel II Seminarhosted by the CBK and Kuwait Bank’s Union in November 2005. Following the issue by CBK of finalBasel II instructions in December 2005 the Board approved a ‘Risk & Disclosure Policy’ at its meetingon 7th January 2006. This updated the Bank’s previous practices to conform to these instructions.

The Capital Adequacy Statement filed by the Bank in respect of Pillar 1 took due account of the BaselII risk weighting analysis prescribed by CBK on the ‘Standardised approach’ and then applied suchhedges and mitigants as were applicable to the Bank’s year end risk portfolio. The conclusion wasthat the adjusted Capital Adequacy ratio on a Basel II basis was 18.37% as at 31st December 2005with 15.98% of this qualifying as ‘Tier 1’ Capital. The Board considers these ratios to be satisfactoryin present circumstances and, as a matter of prudence, will expect to maintain in future a cushion ofat least 3% over the minimum Basel II basis Capital Adequacy level of 12% prescribed by the CBKregulations. This anticipated margin will of course be reviewed from time to time as futurecircumstances or regulatory developments may require.

Further details of the underlying calculations are set out on pages 40 to 59 of this Annual Report.This section also details the quantitative and qualitative disclosures envisaged by Pillar 3 of Basel II inthe form prescribed by CBK. Section 12 of this disclosure statement also indicates the Board’s currentoverview of future Risk management priorities.

28

THE BANK’S GENERAL MANAGEMENT con’t

CONCLUSION

In conclusion, the evolution during the year of Board’s Governance Policy has taken note of CBKguidance, International Good Practice trends and Basel II and IFRS compliance responsibilities.The Board considers that 2005 has been a year in which its Governance definition and the regulatoryimplementation process has made significant progress but it remains well aware that some areas stillrequire priority attention. The Board also appreciates that an ongoing need for development willcontinue as new legal and supervisory requirements become effective. Shareholders will be keptinformed of significant ongoing Governance developments (and how the Bank has dealt with them)in future Annual Reports. Compliance, transparency and enhancement of stakeholder value willremain the Board’s primary considerations in this important area.


29

30

MANAGEMENT REVIEW OF THE YEAR

During the year the Bank recruited two Senior General Managers, thus completing the top levelrecruitment in terms of the organization chart finalized in 2004. Senior General Manager Banking Groupand Senior General Manager Operations were appointed in the summer of 2005, both with extensivebanking experience over many years in the Gulf region and internationally. They both brought resourceand importantly energy to two of the key areas of the Bank responsible for, respectively, the client facingbusinesses of Retail, Corporate, and Private Banking and the support areas of Operations, IT, FinancialAccounting, and Human Resources. With the five key positions responsible for Banking, Treasury andInvestment, Risk, Operations and Strategy, and Financial Planning now filled and fully operational and allreporting directly into the CEO, the Bank now has a senior management team that is probably the mostexperienced by years and diversity of background of any bank in Kuwait. This depth and width ofexperience has already had significant impact on the Bank’s performance in 2005 which will nowcontinue to benefit 2006 and beyond.

In 2005 Senior Management in particular but Management in general continued to carry out themandate agreed with the Board to grow the Bank prudently by maintaining an appropriate balancebetween risk and reward in all the decisions that are taken. This approach clearly put a considerableemphasis on working within the regulatory framework established by the Central Bank of Kuwait and theother regulatory authorities, not only respecting the published regulations and guidelines but asimportantly following their spirit. As mentioned in the Chairman's Statement the growth of assets in2005 has been relatively modest compared to growth rates in 2004 and 2003. This has been a deliberateand determined policy of the Bank and Management to ensure that the quality of the assets is assignedequal importance while achieving growth and priority is given to a conservative stance when assumingcounterparty, operational and market risks.


31

With such an emphasis on a prudent approach to risk it was a challenge to produce the very good financialresults evidenced in this Report. Equal attention was given to maximizing income and controlling costs inorder to optimise the profitability and productivity of the Bank and meet shareholders expectations. In thiscontext, Management has focused on four key areas of activity:

Each of the client facing businesses has given priority to increasing margins wherever possible. This hasbeen achieved by "managing away" lower margin business where the risks are not appropriate and byensuring whenever new or renewal business is written that the Bank optimizes through negotiations withits customers the margin taken by the Bank.

In order to achieve this result each of the client facing businesses has carried out a detailed examination ofits asset portfolio to ensure that the exposure quality is acceptable and that the returns to the Bank for eachclient are commensurate with the assumed risk with pricing adjustments made where considerednecessary.

• Minimizing the cost of funding by moving towards a more optimal mix of deposits and exercising higher diligence in quoting deposit interest rates, while at the same time maintaining the required loan:deposit ratio set by the Central Bank of Kuwait. This has resulted in a "churning" of the deposit book by each of the businesses as they have sought to control the cost of the funds which support their lending activities. The role of Treasury has been critical to the success of this approach as the overall custodian of the asset: liability book of the Bank, as has been the targets given to the businesses to focus not just on the asset side of the Bank but also liability management.

• The effective management and control of costs is always a priority of Management and this wasparticularly the case in 2005 when modest growth in income and assets required particular focus onboth controlling the growth of costs but also identifying areas for cost reduction and elimination.

• While Central Bank of Kuwait regulations and guidelines set limits on the extent and amount of fees that can be charged customers, particularly in the consumer mass market, it was vital to optimizing the income of the Bank that every opportunity to identify non-interest income business was made in 2005. This was achieved across all the businesses.

As result of these efforts, the Banking Group, the Investment Banking and Treasury Group and the SupportGroup all achieved and surpassed their individual income and cost budgets for 2005 with the RiskManagement Group ensuring that the Bank continued to implement and improve new risk managementpolicies consistant with the Bank’s strategy of prudent growth and the requirements of the local regulatoryauthorities and international best practices.

BANKING GROUP

In an increasingly competitive and demanding marketplace all three of the customer facing businessthat make up the Banking Group – Corporate , Private, and Retail Banking – not only had to continue toprovide superior customer service to all the chosen customers but had to continually innovate in bringingnew products and services to the existing and prospective customers.

It is in this context that the launch at the start of the year by the Corporate Banking Division (with thesupport of the Retail Banking Division) of the new B-Dinar labour account has to be seen. This is anaccount that enables a corporate customer to pay all his lower salary workers their monthly salarythrough the use of a payment card that can be used either to draw cash from the Bank's ATM machines

32

MANAGEMENT REVIEW OF THE YEAR con’t

or be used as a debit card when purchasing goods from retail outlets. The B-Dinar account provided theeasiest means to follow government regulations that required payment of salaries via bank accounts. Thisis because this account provides the most flexible bank account in the market at the lowest cost to thesalary earner and is unique in Kuwait.

In contrast, the Corporate Banking Division continued to finance projects both large and small whichwere planned to contribute to the further development of Kuwait's infrastructure and industrial base. Ofparticular note was the Division’s participation in a major project for the establishment, construction andpurchase of plant and equipment necessary to establish the first facility in Kuwait for the maintenanceand repair of electrical transformers, generators, and motors. This will provide full maintenance services tothe five large thermal power stations operating in Kuwait and will reduce the Ministry of Energy's relianceon foreign service companies.

The growth of the population of Kuwait, both indigenous and expatriates, is resulting in a growingdemand for housing and this presents significant opportunities for the Division's specialist team - whichincludes a professional engineer specialised in civil construction works - that concentrates on contractingand construction. Among a number of significant projects financed during the year was a 1220 housingproject valued at over KD 34 Million (over US$ 100 Million) at Jabal Al-Ahmad city.

2005 also saw the development of the Division's international team that concentrates on looking aftersubsidiaries and branches of international companies based in Kuwait but often with regional andsometimes international operations beyond the region. Of particular note was the provision of facilitiesto one leading GCC company for over US$ 70 Million to support their international trading operations.


33

The Private Banking Division is the second largest provider of investment and financial services to high networth individuals in Kuwait. The key to its success is the highly personalized approach to its individualclients while providing access to the best wealth management offerings available in the market througha number of partnerships with international companies. The range of services offered includes trustmanagement, investment products, global health and travel assistance as well as the more traditionallending and deposit taking products.

2005 saw new partnership arrangements concluded, including most importantly an agreement with aleading provider of trust services and family wealth management. In addition to existing investment productsprovided to clients by agreement with internationally recognized names such as Fidelity and MAN, newfunds managed by GIC (the recently announced GCC Equity Fund, the first non-Islamic equity fund launchedacross the GCC) and the Al-Zajel Fund managed by NIC were also introduced to clients with a good response.

The close working relationship that exists with the Bank's sister company Kuwait Asset Management Co.(KAMCO) has again been important to the success of the Division. Not only does KAMCO providecustodial and asset management services to the Bank's clients it also provides on a selective basisopportunities for some of the Division's clients to use their wealth in investing in newly created companiesthat are not yet ready for public flotation through venture capital/private equity transactions. The Divisionhas complemented this with the provision of loans to its clients in support of these important investmentinitiatives subject, of course, to risk assessment and adequate collateral where considered necessary.

The retail banking market went through very significant change in 2005 with new regulations issued bythe Central Bank of Kuwait in 2004, the stricter loan to deposit ratio requirements and restrictions withregard to the tenor and amount available for personal loans being particularly important. The RetailBanking Division responded to the new challenges by launching new products and services that wereinnovative and distinctive while at the same time continuing to reorganise itself internally.

The year saw the launch of a number of new and innovative products which had a significant impact onthe market, not only in achieving the Division's own goals but also in shaping the way the competitionbehaved in response. A prime example of this was the launch of the B-Surprises deposit account product,which not only offered the largest prize draw in Kuwait but also increased the chance of winning byprogressively increasing the size of the deposit made by a customer. The first Co-branded MasterCard waslaunched in September with Virgin Megastores (the new VIP Burgan Bank MasterCard was launched withparticular attention to the youth and younger segment of the market, the fastest growing part of theKuwait’s retail market) under the slogan of the "creditainment". The Bank was also the first in Kuwait toannounce and launch the new Visa logo in partnership with Jazeera Airways, the newly launched Kuwaitilow-cost airline. December also saw the introduction of the Burgan Bank "Welcome Pack" which was thefirst of its kind in Kuwait, allowing new customers of the Bank, immediately upon completing theaccount opening form, to leave the premises with activated credit and debit cards, active SMS phonebanking and on line banking capability.

In addition to new products, two important initiatives were launched during the year, both of which willhave a significant impact on the Division going forward. In the latter part of the summer a new DirectSales Force was established to market the Bank's product and services to (mainly) prospective customers,both in their workplaces and also in shopping malls.

In September a new and dedicated department was established to market and develop the Non-ResidentIndian customer base. Both initiatives have made very significant progress in the last quarter of 2005 withthe result that hundreds of new customers have been recruited to the Bank.

34


Internally, the Division saw great change with all the branches reorganised to reflect the need to separatecustomer management and sales from operational management. Greater lending authorities were givento Branch Managers with adequate reporting and controls, and increased centralization of operatingprocedures took place. All these changes made with the objective of increasing the focus on the Bank'scustomers and prospective customers. One of the main aims of the Bank is to increase "customerdelight" and these measures were introduced as the first steps to achieve this in the branch network.

In a retail business where the branch network remains so important, notwithstanding the availability ofother channels such as phone banking, internet banking, SMS, Call Centers, etc., there is an ongoingrequirement to review and audit the physical branch network and as a result relocate, rebuild, refurbish,expand and build new outlets. In 2005 two new branches were opened, eight new locations for existingbranches were identified and committed and new sets of premises were acquired to expand four existingbranches. This work will continue with an added urgency in 2006. As part of the Division’s drive toincrease its services and "touch points" with its customers the number of ATMs throughout Kuwait wasincreased by 25% to a total of 50.

Finally, towards the latter part of the year a new Head Office organizational structure was approvedwhich will give even more focus to the management of the Division. As part of this organization, newroles and responsibilities have been identified which will ensure the business is better equipped toface the new challenges of 2006 and beyond. It is expected that the assigned team for the Divisionwill be in place by the first quarter of 2006 and will be well placed to improve the performance of theDivision further.


35

INVESTMENT BANKING AND TREASURY GROUP

The Investment Banking and Treasury Group (IBT) is responsible for all wholesale financial markettransactions, both domestically and internationally, and is formed from three separate divisions:• Treasury Division, which together with ALCO undertakes the active cash management of the bank

wide balance sheet. Treasury is also responsible for assuming risk in the global financial markets andit is through this area that the Bank, and its customers, obtain direct access to the international financial markets.

• Investments Division, which is responsible for proprietary capital investment of the Bank.• Financial Institutions Division, which supports the Bank’s international trade and financing activities.

These units were placed under one operating umbrella in 2004 to bring about increased operational andbusiness efficiency, within a bank-wide objective of developing a continuing pattern of sustainable profitgrowth on a year-by-year basis.

While 2005 was another volatile year, with global markets showing different economic outlooks fromcountry to country, IBT produced Group returns that were higher from 2004. The increase inrevenue has been across the market and was aided by the continuing strength of the oil price and otherfinancial market conditions, in particular:• The CBK raising the discount rate in line with similar US Federal Reserves increase• China allowing the Yuan to revalue against the US Dollar with a controlled float• Excess liquidity in the local market in the latter half of the year

Key attention to market conditions has enabled the Group to minimize bank-wide funding costs. TheBank average cost of KD funds (thanks to its improving liability mix) increased only fractionally from thestart of the year while both the KD discount rate and 3 month KIBOR increased substantially over thesame period.

The Bank’s ALCO Committee is responsible for capital and balance sheet management and ensuring thatall risk concentrations fall within acceptable guidelines to both the Bank and the regulatory authorities. Inconjunction with Treasury, the effective control and management of interest rate risk has been improvedthrough enhanced forecasting tools.

Competitive pricing across all products has provided the optimum pricing to our customers and helpedgrow market share. This has been particularly evident in Foreign Exchange transactions, where our marketvolume has seen a significant growth in 2005. FX income increased by 20% in 2005 as compared to 2004.

Internationally, the Financial Institutions Division has continued to expand into new markets and is set tocontinue on a path of expansion, with an emphasis on cross border trade-related transactions.

The year 2005 saw the rebalancing of the investment portfolio of the Bank to improve yields in line withboth the local and international market trends. Particular success has been achieved in the two fundsmanaged by Burgan Bank – Burgan Equity Fund and Burgan Financial Fund. The equity fund, forexample, has managed a total return of 37% in 2005 and has paid 40% cash dividends to investors.New agreements with investment advisors for both portfolios have also been signed.

The IBT Group has performed strongly in 2005 and is well positioned for next year. The Group is alsocurrently integrating new Treasury Management software into the bank-wide platform to supportplanned product growth, increase risk-monitoring capabilities and enhance straight-through processing.

36


OPERATIONS GROUP

The Management continues to use technology as a means of improving the productivity of the Bank anddelivering ever better standards of service to customers. Effective use of technology can support the revenuegenerating businesses of the Bank to grow revenue and control costs. One of the key aims of Management isto leverage the Bank's technological leadership in the market to the full and 2005 was further evidence of this.

Of particular note was the introduction of new advanced Treasury Management software whichincorporates the required functionality to manage positions and their associated risks in real time for alltypes of financial instruments, increase efficiency by eliminating the need for manual inputs and enablestraight-through processing from the front office, to the middle and back offices. This project is well onthe way to be completed with final commissioning in the second quarter of 2006.

In support of a growing card business, a new fraud management system has been introduced to manageand monitor potentially fraudulent card based transactions. With the increasing sophistication offraudsters and the greater mobility of customers, the introduction of such a system is vital. Providing thenecessary protection to the Bank and of course the Bank's customers is a key element in continuing togrow the card business whilst effectively managing risk.

The Bank’s Software Development Team has continued to develop and enhance core banking functionalityin support of new products as well as completing significant upgrades to its phone banking capabilityand online banking. Towards the end of the year, central hardware was completely replaced, providingsufficient processing capacity for the foreseeable future.


37

The Retail Banking Division received the greatest support from IT during 2005 due to the breadth of itscustomer base, its wide range of products and the diversity of channels available to the customers, mostof which are technologically based. Of particular note was the introduction of the prepaid card for theB-Dinar product and services, the work completed for two co-branded credit card initiatives for VirginMegastores and Jazeera Airways and, less glamorously but equally importantly, the introduction of asingle screen process for the opening of accounts for new customers, thereby speeding up the processof account opening in the branches.

The Operations Division continued the centralization strategy adopted in previous years as the banksought to remove the non-customer value adding activities from the branch network. In the last twelvemonths the bank has adopted an aggressive approach to outsourcing non-core activities to specialists,one example being the complete outsourcing of all cash in transit and ATM replenishment activities.This has led to enhanced cash management whilst maximising ATM availability. In addition the bank isclose to completing the outsourcing of paper archives to a document storage specialist.

The Operations Division has utilized workflow technology to streamline processes and reduce cycletimes. For example the adoption of on-line procurement for many of the Banks’ day-to-day purchaseshas created both improved transparency and provided access to a much wider array of suppliers whichhas led to significant cost savings. Finally, the support and the drive behind the introduction of the"Welcome Pack" by both the IT and the Operations Departments have been absolutely vital to its launchand great success to date.

The Human Resources and Development Department is critical to achieving the Bank's Long RangePlan objective of nurturing and developing its staff. To achieve this, the Department's strategy is to havepolicies and procedures, grade structures, and reward systems that enable the Bank to attract, retaindevelop, and importantly motivate staff of the highest calibre. In order to meet the Bank’s objectives inthis area, a strategy of establishing strong alliances with third parties has been followed.

With this in mind, the Bank formed a strategic alliance with the American University of Kuwait in 2005 todevelop a competency-based career development process which will enable the Bank to manage thecareer expectations and succession planning for its employees in a forward thinking and innovative way inthe years to come. A similar alliance was also formed with a leading local company to provide customisedEnglish Language training to all staff in the Retail Banking Division. The first intake of trainees began theircourses in the last quarter of 2005.

The sourcing and recruitment of high quality Kuwaiti employees is a key obligation of the Bank and thishas been facilitated through a third alliance. An agreement has been signed with a leading local humanresources development company to select, recruit, and develop university and college Kuwaiti graduates.This will help the Bank recruit high calibre individuals and also meet its aim of increasing the ratio ofKuwaiti to non-Kuwaiti employees consistent with the government's objectives. At the end of 2005 thefirst intake of 31 Kuwaitis was recruited to the program. With regard to Kuwaitization, the Bank is wellplaced through this initiative and others to meet currently enacted and expected further governmentrequirements in the years to come.

During the year all the HR policies and procedures were revised to support a growing staff base. Thegrading structure has also been completely redesigned based on HR international best practice. Theobjectives here were not only to establish transparency and clarity for each job position but just asimportantly to establish clear performance expectations for each employee.

38


RISK MANAGEMENT GROUP

With the reorganization of the Risk Management Group completed, it assumed additional responsibilityof the preparation of the Bank for the implementation of Basel II Capital Adequacy Guidelines inaccordance with Central Bank of Kuwait instructions. The Group actively participated in industrydeliberations with the representatives of Central Bank of Kuwait in the formulation of the necessaryguidelines. Also, under its overall supervision, the Bank conducted Quantitative Impact Studies (QIS) atdifferent times to assess the impact of the new regulations on the Capital to Risk Assets Ratio (CRAR) ofthe Bank. These studies not only helped the Bank in assessing its capital adequacy but also in making thenecessary changes in its internal systems and processes that would eventually facilitate computation ofthe CRAR in accordance with the applicable guidelines and within the time lines prescribed by CentralBank of Kuwait. The Bank has been fully compliant with the regulations of the Central Bank of Kuwait onthe Revised Capital Adequacy Standard under Basel II Accord and the returns under Pillar 1 and therequired disclosures under Pillar 3 have been published in pages 40 to 59 of this Report.

The Bank, (with guidance from the Board) also completed its Risk and Disclosure Policy that outlines itsapproach to handling the various families of risks arising out of its day-to-day operations. This policydocument outlines the various types of risks and the specified officers who will have the primaryresponsibility for monitoring, controlling and reporting. The document also provides the framework forfinancial reporting and disclosure norms that the Bank has followed.


39

40

PILLAR 3 DISCLOSURES FOR THE 2005 FULL YEAR

1. INTRODUCTION

Under the directives of Central Bank of Kuwait (CBK), banks operating in Kuwait are required to apply the Revised CapitalAdequacy Standard (RCAS) in line with the Basel Committee’s revised capital adequacy framework issued in June 2004,popularly known as Basel II, with effect from 31st Dec. 2005. These instructions cover both the calculation of the Capitalto Risk Assets Ratio (CRAR) under Pillar 1 of RCAS and the disclosure of information under Pillar 3. This part contains thenecessary disclosures pertaining to the Bank’s Capital Structure, Risk Management objectives and policies, informationrelating to the Credit Exposure, Credit Risk Mitigation, Market Risk and Operational Risk as required under the CBKregulations. In arriving at the CRAR, in accordance with the regulations, the Standardized Approach has been used.

2. INFORMATION ON SUBSIDIARIES AND SIGNIFICANT INVESTMENTS

a. Qualitative Information

(I)The CBK regulations apply to:

Burgan Bank S.A.K

(II) Basis of Consolidation

The Bank has a fully owned subsidiary under the name of Burgan Holdings International, a company incorporated inLuxemburg with a paid up capital of USD 2,329,200 (equivalent to KD 680,126). The net worth of this subsidiary asat 31st Dec. 2005 is USD 2,632,965 (equivalent to KD 768,825). While the Bank’s financial statements have notconsolidated this subsidiary due to it not being material, for the purposes of arriving at the eligible capital of the Bankfor computation of CRAR, the Bank’s investment in this subsidiary has been deducted from the capital. This is the onlysubsidiary of the Bank.

Apart from this, there are no other deductions that are required to be made, under the CBK instructions, from thecapital of the Bank on account of its investments, either in the form of significant minority investments in banking,securities or other financial entities or significant investments in commercial entities.

There are no entities whose financial statements have either been fully or partially (on a pro-rata basis) consolidated norany entities from which the surplus capital has been recognized for the computation of CRAR of the Bank.

(III) Restriction/Impediments on Fund Transfers

There are no restrictions or other major impediments on transfer of funds or regulatory capital between the Bank andits fully owned subsidiary, apart from obtaining the necessary approvals from CBK.

b. Quantitative Information

TABLE I Subsidiaries and Significant Investments

* Had the amount been deducted from the capital, the CRAR would have been 17.66%, instead of 18.37% as shown

Surplus capital in insurance subsidiaries, included in

the capital of the Bank NIL NIL

Capital deficiency in subsidiaries,

not included in the consolidation NIL NIL

Current book value of investment in insurance company,

which is risk-weighted * 7,829.118 1.250

Name of the insurance company Gulf Insurance Kuwait Re Insurance

Country of incorporation of insurance company Kuwait Kuwait

Banks percentage of ownership / holding 13.06 NIL

Banks percentage of voting power 13.06 NIL

KD 000s


41

3. INFORMATION ON THE BANK’S CAPITAL STRUCTURE


(I) Main Features of Capital Instruments

The Bank’s paid up capital entirely consists of ordinary shares which have proportionate voting rights. These arelisted in the Kuwait Stock Exchange and are actively traded thereon. The Bank does not have any other type ofcapital instruments.


TABLE II Capital Structure of the Bank

4. INFORMATION ON THE BANK’S CAPITAL ADEQUACY

a. Quantitative Information

Bank’s Approach to Capital Adequacy Assessment

Hitherto, the Bank had in place a system under which the capital adequacy of the Bank as well as the CRAR was beingcalculated at regular intervals, based on the CBK instructions applicable before the issuance of its circular instructionsdated 12/12/2005. After receipt of CBK instructions on the revised computation of CRAR in Dec. 2005, the underlyingsystem for such computation has been revised. Before receipt of the final CBK instructions, the Bank conducted amonthly exercise in computing the CRAR under the RCAS and its impact on the Bank’s capital adequacy. This exerciseled the Bank to the conclusion that its CRAR was well above the required threshold of 12%. (18.4% as on 31stDecember 2005 as compared to –17.8% as at 31st December 2004 under Basel I)

The Bank takes into account the CRAR calculations in respect of all its future business plans so as to ensure that,at all times, the level of its eligible capital is not only sufficient to meet the expected increase in business and particularlythe level of Risk Weighted Assets (RWAs), but also provides a cushion for any unexpected situations. The Bank has,under the directions of its Board of Directors, arrived at a prudential level of additional capital of at least 3% over the

KD 000s Paid up share capital 150,819.394

Reserves 50,735.047

Minority interests in the equity of subsidiaries Nil

Innovative capital instruments Nil

Other capital instruments Nil

Less treasury shares (18,557.034)

Less investment in financial subsidiaries (680.126)

Less goodwill Nil

Less other amounts deducted Nil

TOTAL TIER 1 Capital 182,317.281

Interim profit for the year Nil

Fair value reserve ( 45.00 % only) 14,336.307

General provision ( 1.25% of the total risk weighted assets) 12,995.771

TOTAL TIER 2 Capital 27,332.078

TOTAL TIER 3 Capital Nil

TOTAL ELIGIBLE CAPITAL 209,649.359

42


prescribed 12% under Basel II calculations that it intends to maintain in future, conditions permitting and as may bedetermined by CBK, so as to provide the necessary cushion. The budget for the year 2006 as also the Long Range Plan(LRP) developed by the Bank for the future years always take into account the need to maintain such additional capitalbased on RCAS workings.

The Bank has put in place a system that will enable it to compute the CRAR under the CBK instructions of December.2005 at such periodic intervals as may be deemed necessary, taking into account all the necessary details of its assetportfolio including Credit Risk Mitigation (CRM) techniques, the factors that give rise to market risk as also the capitalnecessary for operational risks. The internal budgetary and performance measurement systems of the Bank take intoaccount the impact of the future growth and performance of its various business groups on the capital allocated to eachsuch business group. It is the intention of the Bank, in due course, to develop a system that will allocate an economiccapital to each business group that factors-in the 3% cushion on the capital adequacy presently required by the Board.

The Bank also plans to develop strategies that will enable it to anticipate increases in capital as may be necessary for itsgrowth plans based on the LRP and at the appropriate time, issue capital instruments eligible under the three tiers ofcapital in accordance with the regulations applicable to each.


Capital Adequacy:

TABLE III Capital Required for each Standard Portfolio Classified in Accordance with CBK Rules

Capital requirement for Market Risk under the standardized approachInterest Rate Risk 2,494.590Equity Position Risk 714.670Foreign Exchange Risk 1,091.164Total Capital requirement for Market Risk 4,300.424

Capital requirement for operational risk 8,525.878Total Capital Requirement 136,915.355

CRAR 18.37Tier 1 CRAR 15.98

1 Claims on sovereigns 72.6762 Claims on international organizations Nil3 Claims on public sector entities (PSE) Nil4 Claims on multilateral development banks (MDB) Nil5 Claims on banks 13,848.0556 Claims on corporate 68,153.9227 Cash items Nil8 Regulatory retail exposures 18,143.8999 Qualifying residential housing loans 2,512.54210 Past due exposures 1,965.77411 Other exposures 20,062.53212 Securitization Nil

TOTAL 124,759.400Less : Capital required for excess in general provision (over 1.25% of RWAs) (670.347)

KD 000s

Total Capital required 124,089.053


43

5. INFORMATION ON THE BANK’S RISK MANAGEMENT

The Bank has set up a Risk Management Group headed by a Senior General Manager who reports directly to theChief Executive Officer, in order to ensure the independence of the function. The Risk Management Group doesnot have any business targets in terms of either levels of business or income/profits to be achieved, with a view toensuring its objectivity in analyzing the various risks. The mission of the Group is to identify, measure and controlvarious risks and report to the top management of the Bank on the effects and, where possible, mitigations.The Bank has a well documented Risk and Disclosure Policy that classifies the risks faced by it in its day-to-dayactivities into certain families of risks and accordingly specific responsibilities have been given to various officersfor the identification, measurement, control and reporting of these identified families of risks. Among the familiesof risks are:

(I) Credit Risk which includes default risk of clients and counterparties (II) Market Risk which includes interest rate, foreign exchange and equity risks (III) Operational Risk which includes risks due to operational failures

The Risk Management Group is organized into, among others, three departments each responsible for the above threefamilies, viz. the Credit Risk, Market Risk and Operational Risk departments.

a. Credit Risk

(I) Strategies and Processes

The Bank has a well-documented Credit Policy that complies with CBK regulations and defines the appetite of the Bankfor assumption of risks in its various business groups viz. the Corporate Banking, Private Banking, Retail Banking andFinancial Institutions groups. The Credit Policy has been developed by the Risk Management Group in consultation withthe business groups and under the guidance and approval of the Board. All the business groups are required to marketfor business and present propositions in accordance with the general and specific guidelines stated in the Credit Policy.Subject to the guidelines of the Policy, each business group may draw up its own business strategy, which is deliberatedat the Management Executive Committee of the Bank and approved by the Board Executive Committee. The Policy alsodefines the types of products that the various business groups can market to their clients and counterparties and anynew product is required to undergo a specific validation process before its launch.

(II) Structure and Organisation

The Credit Risk Department is headed by an Assistant General Manager and has independent teams that arerespectively responsible for Credit Analysis and Credit Control. The Credit Analysis function is responsible formaking independent financial analysis and appraisal of credit proposals that are marketed by the business groups.There are detailed guidelines for financial analysis that are followed by this department which gives its independentviews/recommendations on credit proposals brought to it by the Relationship Managers of the various businessgroups. These proposals are then further processed in accordance with the delegation of powers approved by theBoard. The Bank’s structure of delegation of powers envisages that each credit proposal requires, in addition to therecommendation of the concerned business group, the concurrence of an official of the Risk Management Groupat an appropriate level. This ensures that the approval process has an in-built mechanism of checks and balanceswith the concurrence of an independent functionary before a credit proposal can be approved.

(III) Scope and Nature of Reporting Systems

After the approval of the credit proposal, the Credit Control unit of the Credit department is entrusted with theresponsibility of checking that the conditions precedent for the draw down of the credit facilities as approved arefulfilled before the facilities are made available to the client/counterparty. This unit, which is independent of theCredit Analysis unit of the Department, also follows up on the conduct of the accounts by the client/counterparty inaccordance with the terms of approval and reports any irregularities for necessary corrective action. This unit is alsoresponsible to ensure that the relevant details for measurement of the risk and allocation of the appropriate risk

44


weight to the exposures are made available in the system or otherwise, so that the computation of the RWAs can bemade appropriately. Since the Bank is at present required to follow the Standardised Approach for calculation of theRWAs, the internal ratings ascribed by the Bank for the obligors are not used in the process. However, bearing in mindthe future needs of the Bank in the event of application of the more advanced methods, the Bank is in the process ofintroducing a revised Internal Rating System that may, in due course and subject to availability of statistically meaningfulpast default data, be used to arrive at an enhanced tool for measurement of credit risks.

All the credit proposals approved under delegated authorities are reported with relevant details to the Board CreditCommittee at regular intervals.

(IV) Hedges and Mitigants

The Credit Policy of the Bank, while outlining the risk appetite as regards credit risk, has also laid down guidelines formitigating risks in terms of availability of credit enhancements and/or collaterals to support the exposure, the ratio ofcollateral value to the loan to be granted, the threshold levels for top-up of security and liquidation. The policy andprocedures of the Bank also lay down the required methods and intervals for valuation of the different collaterals so asto determine the necessity for top-up by the client and/or procedure for liquidation. Since there are limited avenuesfor other types of hedges such as Credit Default Swaps etc. in the Kuwaiti banking environment, the chief mitigantsconsidered are eligible collaterals and/or guarantee of acceptable third parties.

b. Market Risk


The operations of the Bank’s Treasury and Investment Banking Group give rise to the market risks assumed by the Bank.The Bank has a well-defined and CBK compliant Treasury Policy that outlines its risk appetite in regard to undertakingtransactions that result in exposures to market risk. Being a specialized area that requires particular knowledge of themarket and various products and players therein, the policy document is prepared by the Treasury Group withinputs/concurrence from the Risk Management, under the guidance and approval of the Board. The Policy coversrules concerning the positions that the Bank assumes in the course of its trading in foreign exchange, equities andfixed-income securities as also the interest rate risk positions of its banking book in terms of mismatches in maturityand/or re-pricing periods. At present, the Bank does not trade in commodities nor takes up any positions in regard tocommodity-based derivatives or other products. The strategies that the Treasury Group plans to adopt during thecoming year are decided on the basis of market forecasts that are made at the time of preparation of the annualbudget. These are, on an ongoing basis, discussed at the Asset Liability Committee (ALCO) meetings and correctiveaction, if any are decided at these meetings. These meetings are chaired by the Chief Executive Officer and areconvened by the Market Risk Controller in the Risk Management Group. The ALCO discusses and deliberates on allaspects of market and liquidity risks.


The Treasury group, in consultation with the Risk Management, lays down the various limits and rules under whichthe various members of the Treasury Dealing Room are allowed to take up positions. These limits are approved by theBoard Executive Committee and where so required under the regulations, also by CBK. These limits relate to intra-dayand overnight positions as well as positions under different maturity buckets, counterparty exposure limits, stop-losslevels etc. While the respect of these limits are monitored by the Senior General Manager – Investment Banking andTreasury, they are also independently monitored by the Market Risk Controller who is placed in the dealing room butreports to the Senior General Manager – Risk Management. The Market Risk Controller reports relevant informationon the treasury activities of the Bank including the various positions taken by the Treasury to the Senior GeneralManager - Risk Management on a daily basis or more frequently if necessary.


45


The Bank is in the process of implementing a new software that will allow independent, on-line monitoring of theintra-day positions from outside the dealing room and this is expected to be operational in the first quarter of 2006.This system is also expected to enable the Market Risk Controller to monitor the activities of the various members ofthe Treasury Dealing Room simultaneously as the dealing transactions are made.


A major part of the banking book of the Bank is in Kuwaiti Dinars (KDs), the other important currencies being theinternationally actively traded currencies. Due to the limited scope for hedging interest rate positions in KDs arising froma limited range of hedging products, the Bank enters into, where reasonably possible, variable interest rate transactionsstructured to enable it to minimize maturity/re-pricing mismatches. As regards the other currencies, the open positionstaken by the Bank are within pre-set limits and tenors for the respective currency. The Bank also makes use of interestrate and currency swaps to hedge its interest rate and currency positions in foreign currencies. The Bank however,makes use of derivatives only for hedging purposes in compliance with CBK regulations.

c. Operational Risk


The Operations Risk Department is headed by the Operational Risk Controller, who reports to the Senior GeneralManager-Risk Management. This department oversees the operational procedures and controls with a view toidentifying the areas of weakness in the operating procedures and processes of the various operating departments ofthe Bank and correcting them from time to time. The Risk and Disclosure Policy of the Bank classifies the various areasof operational risks and identifies specific officers who are primarily responsible for these risks. Thus, for example, thelegal risks fall under the direct responsibility of the legal officer whereas the Information Technology (IT) risks fall underthe responsibility of the Head of IT Department. The specific procedural guidelines for all departments under theOperations Group are overseen by the Operational Risk Controller who also collates various incidents that give riseto operational risks, with an actual or potential loss situation.

For the purpose of separation of the functions of IT development/operations from IT Security, the Operational RiskController is also responsible to independently ensure the necessary IT security systems and procedures. These includeboth internal and external IT security measures.

The Bank also has a Business Continuity and Recovery Plan, which is developed by the Operational Risk Controller withnecessary inputs from other groups.


The various operational functions of the Bank come under the Operations Group headed by the Senior GeneralManager – Operations who oversees the day-to-day operational and support functions. In order to ensure theindependence of the various operating departments, the SGM - Operations reports directly to the Chief ExecutiveOfficer. Also, the processing of the various transactions is governed by Standard Operating Procedures (SOPs) laiddown for each of the operating departments with the necessary inputs/concurrence from, among others, theOperational Risk Controller.


As regards the scope and nature of risk reporting in this area, the Bank has laid down Internal Control Charts (ICCs)that are required to be submitted by the various functionaries at critical levels and with differing periodicities. These arerequired to be submitted to specified supervisors who conduct the necessary follow up in regard to exceptions andensure corrective action. The Bank will, in due course, extend the ICCs to cover all the operational areas of the Bank.

46



The Bank has set up an Incident Management System (IMS) under which various incidents of operational risks arenoted and registered with all the relevant details. These incidents may relate to either actual or potential loss incidentsresulting from an operational failure or dysfunction, either due to external or internal causes. These incidents areanalysed to effect necessary changes in the SOPs so as to enhance the operational controls and to eliminate orminimize the operational loss. These incidents are, at appropriate intervals, reported to the top management of theBank and the appropriate Board Committee.

6. INFORMATION ON THE BANK’S CREDIT EXPOSURES


(I) Definition of Past Due and Impaired Assets

In regard to income recognition, asset classification and provisioning requirements, the Bank, as a matter of policy, followsthe relevant regulations of CBK. Where considered appropriate for reasons of prudence, a more conservative policy isfollowed in regard to the amounts of loan loss provisions than that calculated based on the norms laid dow in theseregulations. The Bank considers an asset or an exposure to be impaired if, in its opinion, the realizable value of the assetor the exposure is less than the value that at which it is carried in the books of the Bank before it considers the necessityof making a specific provision for the same. As defined under the regulations of CBK, a past due exposure is consideredto be one where the client or counterparty has failed to meet his contractual obligation to the Bank towards paymentof the interest or the principal or part thereof on the date on which such payment is due. Thus, if a client is required topay interest at monthly rests and if the interest is not paid upon its debit to the account on the first day of the followingmonth, the loan is considered to be past due. Similarly, if the principal amount of the loan or an installment thereof isnot paid on the day it falls due for payment under the contract entered into by the client with the Bank, such loan isconsidered as past due from the next day. However, as is the international practice in the banking industry and as laiddown under the CBK regulations, an exposure is considered as non-performing if it continues to remain past due for aperiod of 90 or more days. In respect of retail banking loans, an asset is considered as non-performing if 3 or moreinstallments remain unpaid. In all such cases, the exposure will be considered to be impaired.

(II) Approaches for Specific and General Provisions

As required under the CBK regulations, the Bank maintains two types of loan loss reserves. On the Bank’s exposure tonon-bank clients and counterparties that are not covered by collateral in the form of cash or demand/term depositswith the Bank, the Bank is required to maintain a general provision of 2% of the outstanding exposure, both on andoff-balance sheet. If the exposure to a third party is covered by the guarantee of a bank that is rated below ‘A’, in suchcases also, the Bank is required to maintain a general provision of 2% of the outstanding exposure. Out of the generalprovision so maintained, a sum equal to 1.25% of the RWA in the case of on-balance sheet exposures and after theapplication of Credit Conversion Factors and Risk Weights for off-balance sheet exposures is considered to be part ofthe Tier 2 capital of the Bank and the remaining amount is given the same treatment for the purpose of CRAR as if itwas a specific provision, i.e. it is reduced from the RWA of the Bank.

In regard to impaired assets, the Bank determines the necessary level of specific provision in terms of the norms laiddown under the CBK regulations. These regulations require the Bank to make a provision of at least 20% of the valueof the exposure (net of the value of eligible collateral as defined therein) if it remains past due for 90 days or more butless than 180 days, 50% if the period of past due is 180 days or more but less than 1 year and 100% if the past dueperiod exceeds 1 year. However, based on the circumstances of a particular exposure, if and when the Bank considers itnecessary, a higher level of provisioning is made even if these default periods are not attained.

In all cases of non-performing exposures, the Bank does not recognize any accrued income. Interest/commission onsuch exposure is recognized as income only on actual receipt.

The Loan Review and Provisioning Committee of the Bank examines, at monthly intervals, all the delinquent accounts


47

to determine if a specific provision needs to be made for any particular account. The Committee is chaired by the SGM- Risk Management or in his absence, by the Chief Financial Officer to ensure an objective assessment of the concernedexposure without taking into consideration the performance of the Bank or its profits/profitability.

(III) Credit Risk Management Policy

In regard to the credit portfolio of the Bank, the Credit Policy, as stated earlier, defines the risk appetite of the Bank andgives due consideration to the sector of activity of the client/counterparty, the exposure of the Bank to the group towhich the client/counterparty belongs, the quantum of exposure vis-à-vis the capital funds of the Bank, the exposure tothe country of origin of the main cash flow of the client/counterparty, the nature of credit facilities, their purpose andthe source of repayment and any other considerations that are essential for the credit assessment. The availability orotherwise of acceptable collateral, the standing and reputation of the client/counterparty, market reports, the exposuresassumed by other banks on the same client/counterparty etc. are some of the considerations that are examined beforeapproving credit facilities. All credit exposures are reviewed at least once in a year. In the case of locally incorporatedunlisted companies and partnerships with limited liability, the personal guarantee of the main promoters of theenterprise are normally also required .

Since the Bank is at present required to follow the Standardised Approach for credit risk, it does not follow anystatistical methods to estimate either the probability of default or exposure at default or loss given default. Based onthe public ratings given to the clients/counterparties by recognized and approved External Credit Assessment Institutions(ECAIs), the exposures are risk weighted in accordance with the CBK regulations.

(IV) ECAIs and Mapping Process

An exercise to map of these ratings to the exposure of the Bank where applicable, is carried out. Where a general issuerrating is available, the same is used for the relevant exposure of the rated client/counterparty. Where only an issue ratingis available, if the rated issue has comparable characteristics to the Bank’s exposure both in terms of the tenor and otherfeatures such as availability of credit enhancement etc. such rating is considered. CBK now considers Moody’s, Standardand Poor’s and Fitch IBCA as the Approved ECAIs at present and only those clients/counterparties who have a solicitedrating from one or more of these ECAIs, are considered to be rated. Those who are not rated by any of these threeECAIs are considered to be unrated. In order to ensure that the ratings are not considered selectively, if a current ratingfrom one of these ECAIs available in respect of any client/counterparty, it is always taken into account and in such cases,the client/counterparty is not considered as unrated.

48


Gro

ss E

xpos

ure

befo

re

CC

F, C

RM a

nd P

rovi

sion

s

On

Bala

nce

Off

-Bal

ance

Tota

l

Shee

t (F

unde

d)

Shee

t(un

fund

ed)

As

on 3

1/12

/200

5

1C

laim

s on

sov

erei

gns

351,

484.

661

351,

484.

661

2C

laim

s on

inte

rnat

iona

l

orga

niza

tions

N

il

3C

laim

s on

pub

lic s

ecto

r En

titie

s

(PSE

) N

il

4C

laim

s on

mul

tilat

eral

deve

lopm

ent

bank

s (M

DB)

N

il

5C

laim

s on

ban

ks40

0,57

3.27

613

,832

.110

414,

405.

386

6C

laim

s on

cor

pora

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718,

468.

504

237,

860.

617

956,

329.

121

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ash

item

s 22

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.248

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67.2

48

8Re

gula

tory

ret

ail e

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ures

18

7,47

0.79

2 63

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25

1,45

5.78

5

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ualif

ying

res

iden

tial

hous

ing

loan

s 29

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.794

0.

800

29,9

39.5

94

10

Past

due

exp

osur

es

44,7

61.6

17

1,55

3.41

0 46

,315

.027

11O

ther

exp

osur

es

167,

187.

802

167,

187.

802

12Se

curit

izat

ion

0.00

0

TOTA

L 1,

922,

652.

694

317,

231.

930

2,23

9,88

4.62

4

Ave

rage

Exp

osur

e be

fore

CC

F, C

RM &

Pro

visi

ons

*

On

Bala

nce

Off

-Bal

ance

Shee

t(Fu

nded

)Sh

eet(

unfu

nded

)

For

the

year

200

5

382,

240.

339 Nil

9,58

4.77

7 1,

751.

360

Nil

309,

912.

211

10,5

49.4

18

678,

773.

149

241,

688.

289

17,9

02.1

83

193,

376.

336

69,8

11.5

18

31,8

02.9

978.

134

46,9

14.0

22

1,53

1.49

1

178,

227.

986

1,84

8,73

4.00

032

5,34

0.21

0

b. Q

uan

tita

tive

Info

rmat

ion

TA

BLE

IV

CR

EDIT

RIS

K E

XPO

SUR

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Ave

rage

exp

osur

e re

pres

ents

dai

ly a

vera

ge o

utst

andi

ngs

exce

pt in

the

cas

e of

pas

t du

e ex

posu

res,

whi

ch s

how

qua

rter

ly a

vera

ges

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e th

e cl

assi

ficat

ion

of p

ast

due

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000

s


49

On

Bala

nce

Gen

Pro

vO

n Ba

lanc

e Sh

eet

Gen

Pro

vTo

tal

Tota

l Gen

.

Shee

t C

ash

(Unf

unde

d)N

on_C

ash

Expo

sure

Prov

isio

n

(Fun

ded)

As

on

As

on

31/1

2/20

0531

/12/

2005

1C

laim

s on

Sov

erei

gns

351,

484.

661

12.1

13

351,

484.

661

12.1

13

2 C

laim

s on

Inte

rnat

iona

l

Org

anis

atio

ns

Nil

Nil

3 C

laim

s on

Pub

lic S

ecto

r En

titie

s

(PSE

) N

il N

il

4 C

laim

s on

mul

tilat

eral

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elop

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s (M

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il N

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400,

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414,

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2 3,

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84.9

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976

251,

455.

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8.24

3

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Res

iden

tial H

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s 29

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Due

Exp

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61.6

17

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3.41

0 46

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N

il

11

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68

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TA

BLE

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RIS

K E

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KD

000

s

50


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iddl

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rope

U

SA

Rest

of

the

To

tal

East

wor

ld

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laim

s on

sov

erei

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349,

001.

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2,48

2.77

4 35

1,48

4.66

1

2 C

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s on

inte

rnat

iona

l

orga

nisa

tions

N

il N

il

3 C

laim

s on

pub

lic s

ecto

r

entit

ies

(PSE

) N

il N

il

4 C

laim

s on

mul

tilat

eral

deve

lopm

ent

bank

s (M

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N

il N

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172,

272.

133

160,

413.

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76.6

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414,

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386

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22

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ail e

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ures

25

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251,

455.

785

9 Q

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iden

tial h

ousi

ng

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s 29

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29

,939

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10

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due

exp

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39,5

55.8

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1,64

3.19

5 2.

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5,11

3.54

9 46

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11

Oth

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14

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4.18

4 13

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5,

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6,13

4.15

9 16

7,18

7.80

2

12

Secu

ritis

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L 1,

925,

947.

817

196,

032.

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50,9

80.8

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8.88

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2,

239,

884.

624

TAB

LE V

Geo

gra

ph

ic D

istr

ibu

tio

n o

f C

red

it E

xpo

sure

Cla

ssif

ied

to

Sta

nd

ard

Po

rtfo

lio a

s d

efin

ed u

nd

er C

BK

Inst

ruct

ion

s K

D O

OO

s

KD

000

s

The

geog

raph

ic d

istr

ibut

ion

follo

ws

the

sam

e ba

sis

as in

the

pas

t ye

ars.


51

TABLE VI

Breakdown of Exposures by Standard Portfolio and by Residual Contractual Maturity

TABLE VII

Breakdown of Impaired Loans / Past Due Loans by Standard Porfolio

Gross Exposure before Upto 3 months 3 - 6 months 6 - 12 months Over 12 Total

CCF & CRM months

1 Claims on sovereigns 146,718.773 121,079.714 81,862.000 1,824.174 351,484.661

2 Claims on international

organizations Nil

3 Claims on public sector

entitie (PSE) Nil

4 Claims on multilatera

development banks (MDB) Nil

5 Claims on banks 341,935.393 31,086.899 30,914.537 10,468.557 414,405.386

6 Claims on corporates 427,721.890 104,633.082 110,927.912 313,046.237 956,329.121

7 Cash items 22,767.248 22,767.248

8 Regulatory retail exposures 25,300.260 14,302.197 21,635.309 190,218.019 251,455.785

9 Qualifying residential

housing loans 54.836 1.825 52.967 29,829.966 29,939.594

10 Past due exposures 46,315.027 46,315.027

11 Other exposures 120,045.325 1,347.779 1,832.321 43,962.377 167,187.802

12 Securitization Nil

TOTAL 1,130,858.752 272,451.496 247,225.046 589,349.330 2,239,884.624

As On 31/12/2005 Exposure after CCF, Specific provision Charge / (Charge off)

CRM (net of Interest (-) during 2005

in Suspense )

1 Claims on sovereigns

2 Claims on international

organizations


entities (PSE)

4 Claims on multilateral

development banks (MDB)

5 Claims on Banks 435.740 5,267.646 (35.652)

6 Claims on corporates 12,638.288 14,637.360 (372.313)

7 Cash items

8 Regulatory retail exposures 1,756.670 6,113.841 1,230.667

9 Qualifying residential housing loans 1,550.750 494.331 182.728

10 Past due exposures

11 Other exposures

12 Securitization

TOTAL 16,381.448 26,513.178 1,005.430

KD 000s

KD 000s

52


Regu

lar

G

ener

al

Irreg

ular

Spec

ific

To

tal

Tota

l

Expo

sure

Prov

isio

nEx

posu

rePr

ovis

ion

Expo

sure

Prov

isio

n

1 C

laim

s on

Sov

erei

gns

351,

484.

661

12.1

1335

1,48

4.66

112

.113

2 C

laim

s on

Inte

rnat

iona

l

Org

anis

atio

ns

Nil

Nil

3 C

laim

s on

Pub

lic S

ecto

r

Entit

ies

(PSE

) N

il N

il

4 C

laim

s on

mul

tilat

eral

Dev

elop

men

t ba

nks

(MD

B)

Nil

Nil

5 C

laim

s on

Ban

ks

414,

405.

386

141.

210

6,03

7.27

9 5,

267.

646

420,

442.

665

5,40

8.85

6

6 C

laim

s on

Cor

pora

tes

956,

329.

124

18,4

43.5

17

29,7

75.3

94

14,6

37.3

60

986,

104.

518

33,0

80.8

77

7 C

ash

item

s 2

2,76

7.24

8 22

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8 Re

gula

tory

Ret

ail E

xpos

ures

25

1,45

5.78

54,

598.

227

8,29

5.06

1 6,

113.

841

259,

750.

846

10,7

12.0

68

9 Q

ualif

ying

Res

iden

tial

Hou

sing

Loa

ns

29,9

39.5

94

598.

101

2,20

7.29

049

4.33

1 32

,146

.884

1,

092.

432

10O

ther

Exp

osur

es

167,

187.

802

167,

187.

802

11Se

curit

isat

ion

Nil

Nil

TOT A

L 2,

193,

569.

600

23,7

93.1

68

46,3

15.0

24

26,5

13.1

78

2,23

9,88

4.62

4 50

,306

.346

Tab

le V

II a

Cre

dit

Ris

k Ex

po

sure

KD

000

sK

D 0

00s


53

Expo

sure

aft

er C

CF,

CRM

, net

of

Inte

rest

in

Susp

ense

1 C

laim

s on

Sov

erei

gns

Kuw

ait

Oth

er

Euro

pe

USA

Re

st o

f th

e

Tota

l

Mid

dle

East

wor

ld

2 C

laim

s on

inte

rnat

iona

l org

aniz

atio

ns

Nil

3 C

laim

s on

pub

lic s

ecto

r en

titie

s (P

SE)

Nil

4 C

laim

s on

mul

tilat

eral

dev

elop

men

t ba

nks

(MD

B)

Nil

5 C

laim

s on

Ban

ks

93.7

85

101.

855

240.

104

435.

744

6 C

laim

s on

cor

pora

tes

12,6

27.2

86

11.0

00

12,6

38.2

86

7 C

ash

item

s N

il

8 Re

gula

tory

ret

ail e

xpos

ures

1,

740.

431

15.5

92

0.60

6 0.

046

1,75

6.67

5

9 Q

ualif

ying

res

iden

tial h

ousi

ng lo

ans

1,55

0.74

3 1,

550.

743

10

Past

Due

Exp

osur

es

Nil

11

Oth

er E

xpos

ures

N

il

12

Secu

ritiz

atio

n N

il

TOTA

L 16

,012

.245

11

7.44

7 0.

606

Nil

251.

150

16,3

81.4

48

TAB

LE V

III

Geo

gra

ph

ical

Dis

trib

uti

on

of

Imp

aire

d L

oan

s / P

ast

Du

e Lo

ans

KD

000

s

The

geog

raph

ic d

istr

ibut

ion

follo

ws

the

sam

e ba

sis

as in

the

pas

t ye

ars.

54


TABLE IX

Breakdown of Credit Exposures after CRM and CCF into Rated and Unrated

7. INFORMATION ON CREDIT RISK MITIGATION (CRM)


The main CRM techniques applied by the Bank are based on eligible collaterals. Cases where the guarantee of abetter-rated client/counterparty is obtained for exposures to a lower rated client/counterparty are few, mainly due tothe limited number of Kuwaiti corporates for which ratings by approved ECAIs are available. In cases where specificpledge or blocking of deposits is available, on and off- balance sheet netting is also used to mitigate client risks.

(I) On and Off-Balance Sheet Netting

The generic legal documents that the Bank obtains from its clients normally include a clause that permits the Bankto offset the client’s dues to the Bank against the Bank’s dues to him. Thus, if the same legal entity that has obtainedcredit facilities from the Bank also maintains credit balances in its accounts, the Bank would normally have thelegal right to set off the credit balances against its dues. In respect of some counterparty banks, there are specificagreements that provide for netting on and/or off-balance sheet exposures. Additionally, in specific cases, the Bankapproves credit facilities to a client against pledge/block of his deposits to cover the whole or part of his dues.For the purposes of computation of CRAR (also for calculation of general provisions), as a prudential measure,the Bank does not take into account the general lien available to it under the generic documentation but onlyconsiders cases where specific pledge/block of deposits is not in place.

(II) Collateral Policy

It is the Bank’s endeavour to obtain acceptable collateral cover for its exposures as far as commercially practicable.The collateral normally consists of real estate properties, shares listed in Kuwait and other leading stock exchanges,other traded and untraded securities such as bonds, mutual funds etc. In some cases, in order to ensure the promoter’s

as on 31/12/2005 Rated Unrated TOTAL

1 Claims on Sovereigns 605.631 605.631

2 Claims on International

organizations Nil


entities (PSE) Nil

4 Claims on multilateral

development banks (MDB) Nil

5 Claims on banks 92,730.761 22,669.699 115,400.460

6 Claims on corporates 1,168.000 566,781.346 567,949.346

7 Cash items 0.000

8 Regulatory retail exposures 151,199.135 151,199.135

9 Qualifying residential

housing loans 20,937.847 20,937.847

10 Past due exposures 16,381.448 16,381.448

11 Other exposures 167,187.800 167,187.800

12 Securitization 0.000

TOTAL 93,898.761 945,762.906 1,039,661.667

KD 000s


55

commitment, the Bank also obtains other forms of collateral such as unlisted shares/securities etc. These securities asalso the real estate collateral is of course are not considered for CRM purposes. While the Bank will be willing to acceptother eligible collaterals as defined by the CBK such as gold, eligible debt instruments etc. these are not generallyoffered by clients/counterparties to the Bank. Accordingly, the predominant form of eligible collateral is in the form ofshares listed and traded on the Kuwait Stock Exchange that forms part of its main index.

Under Kuwaiti laws, the repossession and enforcement of a mortgage on the primary residence of a borrower isnot permitted except under specific conditions. The bulk of the residential mortgage loans of the Bank in its RetailBanking Group are therefore not considered to be collateralized by the primary residence, even though mortgagedocuments are obtained from clients. Only in some cases, where the legal conditions for enforcement are fulfilled,these are considered to be retail exposures collateralized by residential mortgages and are applied the relevant weight.

(III) Main Types of Collateral

The Credit Policy of the Bank defines the types of collateral that are acceptable and the collateral coverage ratio,which is the ratio of the exposure to the value of the collateral, for each type of acceptable collateral. The policyalso stipulates that the terms of credit facilities should stipulate a top-up level. If the value of collateral falls to a levelwhere the coverage ratio breaches the top-up level, the client is required to either lodge additional collateral or reducehis outstanding dues accordingly. If the client fails to do either of these and the value of collateral falls further, theterms also stipulate a liquidation threshold, which is the level of coverage at which the Bank may proceed to liquidatethe collateral to realize its dues. These various ratios, after approval, are monitored independently by the CreditControl unit and reported to the concerned business group for follow up with the client.

(IV) Collateral Valuation and Management

The Bank follows a system under which the collateral valuation is independently verified. In respect of real estateaccepted as collateral, the valuation is done normally on an annual basis by an independent valuer, approved by theBank. In respect of shares and other securities listed on the Kuwait Stock Exchange, the valuation is computed daily,based on the prices declared by the Stock Exchange at the end of the day. The valuation of other collateral such asunlisted shares is done on such bases as may be considered appropriate, on a case-by-case basis. The valuationprocess is handled by the Credit Control unit of the Bank with no involvement of the concerned business groupwho are kept informed of the value of client collateral.

(V) Guarantees for Credit Enhancement

As stated earlier, there are very few cases where guarantee of a better-rated entity is obtained for the exposure to alower rated entity. In these cases, where the rating is given by an approved ECAI, the guarantor’s rating is substitutedin place of the rating of the borrower, for the purpose of computation of RWAs. Where the guarantor and/or theborrower are/is not rated by an approved ECAI, the Bank uses its internal assessment to determine the acceptabilityof the guarantee but for the purpose of computation of RWA, this has no effect.

(VI) Concentration

The Bank makes an endeavour to avoid concentration of collateral as far as possible. To this intent, when collateral inthe form of listed shares is accepted, the year-to-date daily traded volumes of the concerned share and the averagenumber of trades are examined and these are, among other points, taken into consideration in making a decision toaccept the collateral and stipulating the concerned threshold ratios stated above.

56



TABLE X

Exposure Covered by Eligible Collateral and Guarantee

8. INFORMATION ON MARKET RISK FOR TRADING PORTFOLIO, FOREIGN EXCHANGE ANDCOMMODITIES EXPOSURES


The Bank applies the Standardised Approach for computing its market risk on its trading portfolio and at present doesnot use the Internal Model Approach (IMA). Under the Standardised Approach, the risk exposure is quantified accordingto the levels stipulated by the CBK.


Market Risk: TABLE XI

Capital Requirement for Market Risk

As on 31/12/2005 Exposure after Covered by

CCF,

net of

Suspended

Interest

Financial Collateral, Guarantees

after application of

haircuts as

stipulated by CBK

1 Claims on sovereigns 351,511.530

2 Claims on International organizations

3 Claims on Public Sector Entities (PSE)

4 Claims on multilateral development banks (MDB)

5 Claims on banks 404,992.483

6 Claims on corporate 838,786.428 266,165.082

7 Cash items 22,767.248

8 Regulatory retail exposures 222,247.600 20,648.755

9 Qualifying residential housing loans 29,939.194 23.149

10 Past due exposures 19,466.028

11 Other exposures 167,187.802

12 Securitisation

TOTAL 2,056,898.313 286,836.986 Nil

Interest rate Risk 2,494.590

Equity position Risk 714.670

Foreign exchange risk 1,091.164

Commodity Risk 0.000

Total 4,300.424

KD 000s

KD 000s


57

9. INFORMATION ON OPERATIONAL RISK

As stipulated by CBK, the Bank uses the Standardised Approach for computation of Operational Risk and the capitalrequired for this. Out of the eight business lines defined by CBK, the Bank’s operations are confined to only to five,and the Bank does not presently operate in Corporate Finance, Agency Services and Retail Brokerage. For theremaining business lines, the Bank uses the stipulated beta factors. Additionally, as stated earlier, the Bank has putin place an Incident Management System to track operational risk incidents and eventually, the system is expected toassist the Bank develop a more advanced approach for operational risk, if and when this is approved or mandated bythe authorities.

10. INFORMATION ON THE EQUITY POSITION IN THE BANKING BOOK


(I) Classification of Investments

Except for the shares of its fully owned subsidiary, Burgan International Holdings, S.A. all of the Bank’s investments inequities are classified either as ‘Available for Sale’ or ‘Held for Trading’. Investments in equities that are acquired primarilyfor the purpose of short-term profit making are classified as held for trading and all other investments are classified asavailable for sale. The equity shares classified as held for trading are in the trading book of the bank while the otherinvestments are in the banking book.

(II) Accounting Policy and Valuation Methodology

The accounting policies concerning investments and their valuation methodologies are described in detail under the“Summary of Significant Accounting Policies” elsewhere in this Annual Report. During the year 2005, there has beenno significant change in these policies and methodologies.

The Bank’s Investment Committee examines proposals for investments that come from the Investment Departmentunder the Senior General Manager – Treasury and Investment Banking and are deliberated at the Committeebefore being sent for the final decision of the Board executive Committee. The Investment Committee also takesa view on appropriate classification of the concerned investment, based on the Bank’s objective in makingthe investment.

58


b. Quantitative Information TABLE XII

Investments

Capital Requirement by Equity Groupings

11. INFORMATION ON INTEREST RATE RISK IN THE BANKING BOOK (IRRBB)


The interest rate risk on the banking book arises due to maturity/re-pricing mismatches of the assets and liabilities inthe banking book. For the purpose of monitoring such interest rate risk, the Bank has in place a system that tracks theresidual contractual maturities of all its interest bearing assets and liabilities as also their re-pricing periods. From suchdata, a cash flow is prepared showing the relevant mismatches in re-pricing periods, classified into various maturitybuckets. The interest rate cash flow disregards any non-interest bearing assets and liabilities since they do not affect theIRRBB. However, these are assumed to re-price on an overnight basis to provide for their replacement by interestbearing liabilities or assets.

The Bank normally levies a pre-payment charge for both its assets and liabilities that a client/counterparty offers toliquidate before its contractual maturity date. Such pre-payment charge takes into account the interest rate risk facedby the Bank on account of such a pre-payment request and the resultant replacement cost of such asset or liability atmarket rates as on the date of pre-payment. Therefore, in cases where the Bank levies such a charge, no need isfelt, from the point of view of IRRBB (and not from the point of view of liquidity), to make assumptions regardingpre-payments, as the Bank reserves the right to decline the pre-payment request. The cases where such pre-paymentcharge is not to be levied are referred to the relevant authorities with the necessary powers.

All non-maturity deposits are considered repayable on demand and are accordingly placed in the overnight maturitybucket as required under CBK regulations. Due to this prescription of the CBK rules that the banks must follow,

TYPE PUBLICLY TRADED PRIVATELY HELD

Equities 54,663.240 9,727.670

Fixed income instruments 2,500.000

Collective investment schemes 20,336.372

Any other investments 6,525.199

TOTAL 54,663.240 39,089.241

Gains / (Losses) due to sale / liquidation during 2005 5,728.429

Unrealized gains (losses) recognized in the balance Sheet,

but not through P & L account * 31,858.461

Latent revaluation gains (losses) for investments recorded

at cost, not recognized in balance sheet or the P & L

account @ N/A

Amount included in Tier I capital (* and @) Nil

Amount included in Tier II capital (* and @) 14,336.307

Strategic investments 680.126Investments available for sale 8,610.471Held for trading 536.216TOTAL 9,826.813

KD 000s


59

all non-maturity deposits are assumed to be re-priced the next day, instead of their placement in appropriate bucketsbased on a behavioural analysis of such deposits. Certain details related to IRRBB are prepared and presented to at themonthly meetings of the ALCO, which also deliberates in the matter.

b. Quantitative information

12. OVERVIEW AND CONCLUSION

It is considered by the Board and Management of the Bank that, as at the end of 2005, the institution had created andimplemented a risk management, control and evaluation system that is:

– Responsive to present priority risk management needs – Compliant both with historic regulatory instructions and substantially in conformity with the enhanced Basel

II driven requirements detailed by CBK in their December 2005 instruction document, and – Meets generally accepted international risk management standards for a financial institution of the size and

complexity of the Bank.

The Board has now requested the Management of the Bank to give priority to detailed enhancement of underlyingprocedures and processes to achieve full operational conformity with the policies set out in this section in an integratedand cost efficient manner. With this objective,

– A new fully integrated Treasury System is now being introduced and is expected to be fully operational by 30th June 2006

– Detailed operating procedures are being revised and updated to take account of recent developments not only for Basel II compliance but also in the Bank’s products, practices and structure

– The Bank’s IT security and control structure is being independently evaluated by outside specialist consultants.

The Bank Management expects to complete these major initiatives by the end of 2006 and for the enhancement,proposals to have been both considered in depth by the appropriate Management Committees and approved by BoardCommittees as required by the Bank’s Governance structure.

The mid-year interest rate sensitivity analysis conducted by the Bank indicated that for an even increase in interestrates by 200 basis points (2%) the annual net interest income of the Bank would have gone up by 15% whereasan even reduction in interest rates by the same level would have resulted in a reduction of net interest income by17%. Since the banking book is predominantly in KDs, this exercise is conducted on the consolidated book. Thisanalysis is now being conducted at monthly intervals.

60

HEAD OFFICE AND BRANCHES

Main BranchAbdulla Al-Ahmad Street, Sharq, Kuwait Al-SalmiyaP.O.Box: 5389, Postal Code 13054 Safat Salem Al-Mubarak Street, Salmiya Tel: 2988000 Fax: 2988092 Tel.: 5721635, 5721627, 5721629 Fax: 5721634

Al-Ahmadi Fahed Al-SalemMoustafa Karam Square, Area 3, East Al-Ahmadi, Al-Ahmadi Fahed Al-Salem Street, KuwaitTel:3980603, 3987372 Fax: 3985329 Tel.: 2428451, 2428452, 2428424 Fax: 2428423

Shuwaikh Industrial Shuwaikh ResidentialBanks' Area, Shuwaikh Indusrial Area Street No.21, Area 2, Shuwaikh (B)Tel.:4830698, 4830924, 4830854 Fax:4821891 Tel.: 4839285, 4813799, 4843287 Fax: 4846247

Al-Shaheed Adailiya BranchKhalid Bin Waleed St., Al-Shaheed Tower, Kuwait Adailiya Co-op., Adailiya Area Tel.: 2410818, 2410813, 2452304 Fax: 2410819 Tel: 2570146 - 2513438 - 2513439 Fax:2570143

Hawalli Jahra Commercial BranchBeirut Street, Sh.Duaij Al-Sabah Bldg., Hawalli Al-Kheima Mull, Commercial Area, JahraTel.: 2655763, 2655769, 2655870 Fax:2655749 Tel. 4558192 / 3 / 4 - 4558147 Fax: 4558174

Al-Jahra Airport BranchTyma'a Central market, Al-Jahra Co-operative, Jahra Airport Mall, Kuwait AirportTel.: 4579166, 4578618, 4574601 Fax: 4577842 Tel.: 4344256 - 4331767 - 4318676 Ext. 1122/3/4 - Fax: 4341741

Abdulla Al-Salem Marina Mall Abdulla Al-Salem Street, Kuwait Salem Al-Mubarak St., Building No. 168, Block 7, SalmiyaTel.: 2417377, 2417411, 2461150 Fax: 2461383 Tel.: 2244530/1/2/4/6/7 - Fax: 2244535

Sabhan South SurraPlot No.2, Area 5, Sabhan Industrial Area,Sabhan Al-Salam Area - Block 7 - Al-Salam Co-op.Tel.: 4738276, 4719039, 4719034 Fax: 4719036 Tel.: 6922687 - 6922689 - Fax: 6518007

Al-Qurein RiqqaStreet No. 153, Area 5, Sector B(1), Al-Qurein South Riqqa, Minsitry of Finance Tel.:5425316, 5425326, 5432478, 5432479 Fax: 5426196 Tel.: 3940356 - 3940357 - 3940358 - Fax: 3940348

GROUPTelephone Fax

Treasury & Investment Banking 2988988 2430862Retail Banking Group 2988433 2988470Corporate Communications Dept. 2988400 2988419Corporate Banking Group 2988306 2988313Private Banking Group 2988761 2400941Dealing Room 2418538

24175942404429 2988583

Bank Cards Services 29881082988099 2417852

Burgan Bank S.A.K.

Financial Statementsfor the year ended 31 December 2005

BURGAN BANK S.A.K.

The attached notes 1 to 22 form an integral part of these financial statements3

Statement of IncomeYear ended 31 December 2005

2005 2004Note KD 000s KD 000s

Interest income 91,446 74,725

Interest expense (48,269) (41,956)

Net interest income 43,177 32,769

Net gains from foreign currencies 1,459 1,179

Net gains from investment securities 5,728 3,766

Dividend income 4,693 2,907

Fees and commissions 13,287 13,343

Other income 838 84

Operating income 69,182 54,048

Staff expenses (8,716) (8,332)

Other expenses (11,908) (9,189)

Operating profit before provisions 48,558 36,527

Provision for impairment of loans and advances 6 (4,076) (2,022)

Impairment of investment securities (660) (3,883)

Operating profit 43,822 30,622

Contribution to the Kuwait Foundation for the Advancement ofSciences (KFAS)

(394) (276)

Board of Directors' remuneration (70) (70)

National Labour Support Tax (NLST) (974) (680)

Profit for the year 42,384 29,596

Fils Fils

Earnings per share 14 51.9 34.9

BURGAN BANK S.A.K.


Statement of Changes in EquityYear ended 31 December 2005

ShareCapital

KD000s

SharePremiumKD 000s

TreasuryShares

KD 000s

StatutoryReserveKD 000s

VoluntaryReserveKD 000s

TreasurySharesReserveKD 000s

InvestmentsRevaluation

ReserveKD 000s

RetainedEarnings

TotalKD 000s

Balance at 31 December 2003 81,962 64,759 (224) 14,386 14,764 1,547 16,740 17,606 211,540

Available-for-sale investments:

- Net fair valuation gains - - - - - - 1,665 - 1,665

- Net transfer to income statement - - - - - - 345 - 345

- Gain on Sale on Treasury Shares - - - - - 52 - - 52

Net gain recognized directly in equity - - - - - 52 2,010 - 2,062

Net profit for the year - - - - - - - 29,596 29,596

Total recognised income for the year - - - - - 52 2,010 29,596 31,658

Transfers to reserves - - - 2,960 2,960 - - (5,920) -

Dividends paid - - - - - - - (12,227) (12,227)

Issue of bonus shares 4,098 - - - - - - (4,098) -

Purchase of treasury shares - - (10,541) - - - - - (10,541)

Sale of treasury shares - - 650 - - - - - 650

Balance at 31 December 2004 86,060 64,759 (10,115) 17,346 17,724 1,599 18,750 24,957 221,080

Available-for-sale investments: -

- Net fair valuation gains - - - - - - 14,604 - 14,604

- Net transfer to income statement - - - - - - (1,496) - (1,496)

Net gain recognised directly in equity - - - - - - 13,108 - 13,108

Profit for the year - - - - - - - 42,384 42,384

Total recognised income for the year - - - - - - 13,108 42,384 55,492

Transfers to reserves - - - 4,382 4,382 - - (8,764) -

Dividends paid - - - - - - - (20,830) (20,830)

Purchase of treasury shares - - (8,442) - - - - - (8,442)

Balance at 31 December 2005 86,060 64,759 (18,557) 21,728 22,106 1,599 31,858 37,747 247,300

BURGAN BANK S.A.K.


Statement of Cash FlowsYear ended 31 December 2005

2005 2004Note KD 000s KD 000s

Operating activitiesProfit for the year 42,384 29,596Adjustments:

Net gains from investment securities (5,728) (3,766)Dividend income (4,693) (2,907)Depreciation 2,472 2,717Provision for impairment of loans and advances 4,076 2,022Impairment of investment securities 660 3,883

Operating profit before changes in operating assets and liabilities 39,171 31,545Decrease / Increase in operating assets and liabilities:

Treasury bills and bonds 26,828 17,317Due from banks and other financial institutions (60,864) 121,700Loans and advances to customers (53,717) 104,052Government debt bonds 50,636 24,576Other assets (5,598) 1,340Due to banks 38,913 (132,571)Due to other financial institutions 1,580 (38,948)Certificates of deposit (86) (135,075)Deposits from customers 118,342 116,812Other liabilities (3,110) 12,454

Net cash from operating activities 152,095 123,202

Investing activitiesPurchase of investment securities (24,903) (8,232)Sale of investment securities 33,771 20,506Net additions to property and equipment (687) (2,422)Dividends received 4,693 2,907

Net cash from investing activities 12,874 12,759

Financing activitiesOther borrowed funds (29,895) (13,585)Net purchase of treasury shares (8,442) (9,839)Cash dividend paid (20,830) (12,227)

Net cash used in financing activities (59,167) (35,651)Net increase (decrease) in cash and cash equivalents 105,802 100,310Cash and cash equivalents at beginning of year 265,587 165,277Cash and cash equivalents at end of year 3 371,389 265,587

BURGAN BANK S.A.K.Notes to the Financial StatementsAt 31 December 2005

6

1. INCORPORATION AND PRINCIPAL ACTIVITIES

Burgan Bank S.A.K. (the ‘Bank’) is a public shareholding company incorporated in the State of Kuwait by Amiri Decreedated 27 December 1975 and listed on the Kuwait Stock Exchange. It is registered as a Bank with the Central Bank ofKuwait. The Bank’s address is P.O. Box 5389, Safat 12170, State of Kuwait. It is engaged in all banking activities.

These financial statements have been approved for issue by the Board of Directors on 7 January 2006.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The following is a summary of the principle accounting policies adopted in the preparation of these financial statements.

Basis of preparation

The financial statements have been prepared in accordance with International Financial Reporting Standards as adoptedfor use by the Government of Kuwait for financial services institutions regulated by the Central Bank of Kuwait. Theseregulations require adoption of all International Financial Reporting Standards (IFRS) except for the IAS 39 requirementfor collective provision, which has been replaced by the Central Bank of Kuwait’s requirement for a minimum generalprovision as described under the accounting policy for impairment of financial assets.

These financial statements have been presented in Kuwaiti Dinars.

The accounting policies used in the preparation of the financial statements are consistent with those used in previous year,with the exception of the following policies which has been revised due to certain International Financial ReportingStandards (IFRS) that became mandatory for the financial years starting on or after 1 January 2005. The principal effectsare discussed below:

IAS 32 “Financial Instruments: Disclosure and Presentation” and IAS 39 “Financial Instruments: Recognitionand Measurement”.

ClassificationThe Bank has changed the classification of “financial assets held for trading” to “financial assets at fair value throughstatement of income” and “originated loans and advances” to “loans and receivables”.

Impairment of investments available for saleIn the case of available for sale equity investments reversal of previously recognised losses are no longer recognised inthe statement of income but as increase in investment revaluation reserve. There is no impact on the statement of incomefor the comparative year ended 31 December 2004 or on retained earnings at 1 January 2004 as there were no suchreversals in the prior year.

Transition adjustmentThere is no impact on the statement of income for the comparative year ended 31 December 2004 or on retained earningsat 1 January 2004 as there was no such unrecycled adjustment to retained earnings.

Derecognition of financial assetsWith effect from 1 January 2005 a financial asset (in whole or in part) is derecognised when the rights to the cash flowsfrom the financial asset expires or when the bank transfers substanially all the risks and rewards of ownership.

Measurement Basis

The financial statements are prepared under the historical cost measurement basis, as modified for the revaluation at fairvalue of financial assets at fair value through statement of income, available for sale financial assets and derivativefinancial instruments.

Financial assets and liabilities

The Bank classifies its financial assets and liabilities as “financial assets at fair value through statement of income”,“financial assets available for sale”, “loans and receivables” and “financial liabilities”.


7

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Financial assets at fair value through statement of income are divided into two sub categories: “Financial assets held fortrading” and “those designated at fair value through statement of income at inception”. The Bank classifies financialassets in this category, if they are acquired primarily for the purpose of making a short term profit or if so designated bymanagement. Derivatives are also classified as “held for trading” unless they are designated as hedges and are effectivehedging insturments.

Financial assets which have fixed or determinable payments but are not quoted in an active market are treated as loansand receivables.

Financial assets which are principally acquired to be held for an indefinite period of time which may be sold in responseto needs for liquidity or changes in interest rates, exchanges rates or equity prices are classified as available for sale.

The bank recognises financial assets and financial liabilities on the date it becomes a party to the contractual provisions ofthe instruments. A regular way purchase and sale of financial assets are recongnised using settlement date accounting.Changes in fair value between the trade date and settlement date are recognised in statement of income in accordancewith the policy applicable to the related instrument. Regular way purchases or sales are purchases or sales of financialassets that require delivery of assets within the time frame generally established by regulations or conventions in themarket place.

Financial assets and liabilities are measured initially at fair value. Transaction costs are added only for those financialinstruments not measured at fair value through statement of income.

Financial assets at fair value through statement of incomeAfter initial recognition, financial assets at fair value through statement of income are remeasured at fair value with allchanges in fair value recognised in the statement of income.

Financial assets available for saleAfter initial recognition, financial assets available for sale are measured at fair value with gains and losses beingrecognised as a separate component of equity until the financial assets is derecognised or until the financial assets isdetermined to be impaired at which time the cumulative gain and loss previously reported in equity is included in thestatement of income. Financial assets whose fair value cannot be reliably measured are carried at cost less impairmentlosses, if any.

Loans and receivablesLoans and receivables and are carried at amortised cost using the effective yield method.

Financial liabilitiesFinancial liabilities are stated at amortised cost using the effective yield method.

Fair valueThe fair value of financial instruments traded in recognised financial markets is their quoted market price, based on theclosing bid prices. For financial instruments where there is no quoted market price, a reasonable estimate of fair value isdetermined by reference to the current market value of another instrument that is substantially the same or is derived fromrecent arm’s length transactions, discounted cash flow analysis or other valuation techniques commonly used by marketparticipants.

The fair value of financial instruments carried at amortised cost is estimated by discounting the future contractual cashflows at the current market interest rates for similar financial instruments.

The fair value of derivative is the equivalent of the unrealized gain or loss form marking to market the derivative usingprevailing market rates or internal pricing models.

DerecognitionA financial asset (in whole or in part) is derecognised when the rights to the cash flows from the financial asset expires or,when the bank transfers substantially all the risks and rewards of ownership. A financial liability is derecognised whenthe obligation specified in the contract is discharged, cancelled or expired.


8


OffsettingFinancial assets and liabilities are offset when the Bank has a legally enforceable right to offset and intends to settle eitheron a net basis or to realise the asset and settle the liability simultaneously.

Impairment of assets

A financial asset is impaired if its carrying amount is greater than its estimated recoverable amount. An assessment ismade at each balance sheet date to determine whether there is objective evidence that a specific financial asset, or a groupof similar assets, may be impaired. If such evidence exists, the estimated recoverable amount of a debt instrument isdetermined based on the net present value of future cash flows, discounted at original interest rates, and of an equityinstrument is determined with reference to market rates or appropriate valuation models. Any impairment loss isrecognised in the statement of income.

Loans by the Bank are subject to credit risk provisions for impairment if there is objective evidence that the Bank will notbe able to collect all amounts due. The amount of provision is the difference between the carrying amount and therecoverable amount, being the present value of expected future cash flows (excluding future credit losses that have notbeen incurred), including amounts recoverable from guarantees and collateral, discounted based on the original effectiveinterest rate. Loans and advances are written off against the provision when there is no realistic prospect of recovery. Inaddition, in accordance with Central Bank of Kuwait instructions, a minimum general provision of 2% on all creditfacilities net of certain restricted categories of collateral, and not subject to specific provision, is made.

According to the Central Bank of Kuwait instructions, a general provision of 2% on all credit facilities net of certainrestricted categories of collateral which are not subject to specific provision has been made.

Derivative financial instruments and hedging

Where derivative contracts are entered into by specifically designating such contracts as a fair value hedge or a cash flowhedge of a recognised asset or liability or a forecast future transaction, the Bank accounts for them using hedge accountingprinciples, provided certain criteria are met.

In relation to fair value hedges, which meet the condition for hedge accounting, changes in the fair value of derivatives arerecorded in the statement of income, along with the corresponding change in fair value of the hedged asset or liability thatis attributable to that specific hedged risk.

In relation to cash flow hedges, which meet the conditions for hedge accounting, the portion of the gain or loss on thehedging instrument that is determined to be an effective hedge is recognised directly in equity and the ineffective portionis recognised in the statement of income. For cash flow hedges affecting future transactions subsequently results in therecognition of a financial asset or a financial liability, the associated gains or losses which are recognised in equity are re-classified to the statement of income in the same period or periods during which the financial asset or financial liabilityeffects statement of income.

Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or it no longerqualifies for hedge accounting or the forecast transaction is no longer expected to occur or the designation is revoked. Atthat point in time, any cumulative gain or loss on the hedging instrument recognised in equity is kept there until theforecast transaction occurs. In cases where the forecast transaction is no longer expected to occur or the designation isrevoked, the net cumulative gain or loss recognised in equity is transferred to the statement of income.

In the case of fair value hedges of interest-bearing financial instruments, any adjustment to its carrying value relating tothe hedge is amortised over the remaining term of maturity.

If such derivative transactions, while providing effective economic hedges under the Bank’s risk management policies donot qualify for hedge accounting under the specific rules of IAS 39, they are treated as derivatives held for trading.Derivatives with positive fair values (unrealised gains) are included in other assets and derivatives with negative fairvalues (unrealised losses) are included in other liabilities in the balance sheet. The resultant gains and losses are includedin statement of income.


9

Treasury shares

The Bank’s holding in its own shares is stated at acquisition cost and is recognised in equity. These shares are not entitledto any cash dividend that the Bank may propose.


Gains or losses arising on sale of treasury shares are separately disclosed under equity and in accordance with CentralBank of Kuwait instructions, these amounts are not available for distribution.

Foreign currency

Foreign currency transactions are recorded in Kuwaiti Dinars at the rates of exchange prevailing at the trade dates of thetransactions. Monetary assets and liabilities in foreign currencies are converted into Kuwaiti Dinars at the rates ofexchange prevailing at the balance sheet date. The resulting exchange gains and losses are taken to the statement ofincome.

Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated to KuwaitiDinars at the foreign exchange rates ruling at the dates that the values were determined. In case of non-monetary assetswhose change in fair values are recognised directly in equity, foreign exchange differences are recognised directly inequity and for non-monetary assets whose change in fair value are recognised directly in the statement of income arerecognised in the statement of income.

Income recognition

Interest income and expense are recognised in the statement of income for all interest bearing instruments on an accrualbasis taking account of the principal outstanding and the rate applicable. Interest income includes coupons earned on fixedincome investment and accrued discount and premium on treasury bills and other discounted items. Once a financialinstrument categorised as “loans and receivables” is impaired, interest is calculated based on expected future cash flows(excluding future credit losses that have not been incurred) used for the purpose of measuring the impairment.

Fees and commissions charged for servicing a loan are recognised as revenue as the services are provided. Loancommitments fees for loans that are likely to be drawn down are deferred together with related direct cost and recognisedas an adjustment to the effective interest rate on the loan.

Dividends income is recognised when the right to receive such income is established.

Fiduciary assets

Assets held in trust or in a fiduciary capacity are not treated as assets of the Bank and accordingly are not included inthese financial statements.

Repurchase and resale agreements

Assets sold with a simultaneous commitment to repurchase at a specified future date (repos) are not derecognised.Amounts received under these agreements are treated as liabilities and the difference between the sale and repurchaseprice treated as interest expense using the effective yield method.

Assets purchased with a corresponding commitment to resell at a specified future date (reverse repos) are not recognisedin the balance sheet. Amounts paid under these agreements are treated as assets and the difference between the purchaseand resale price treated as interest income using the effective yield method.

Contingencies

Contingent liabilities are not recognized in the financial statements, but are disclosed unless the possibility of an outflowof resources embodying economic benefits is remote.

Contingent assets are not recognized in the financial statements, but are disclosed when an inflow of economic benefit isprobable.


10

SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES

JudgementsIn the process of applying the Bank’s accounting policies, management has made the following judgements, apart fromthose involving estimations, which have the most significant effect in the amounts recognised in the financial statements:

Classification of financial assets and liabilitiesManagement decides on acquisition of financial assets whether it should be classified as financial assets carried at fairvalue through statement of income or available for sale.

The Bank classifies financial assets as carried at fair value through statement of income if they are acquired primarily forthe purpose of short term profit making.

Impairment of investmentsThe Bank treats available for sale equity investments as impaired when there has been a significant or prolonged declinein the fair value below its cost or where other objective evidence of impairment exists. The determination of what is“significant” or “prolonged” requires considerable judgement.

Estimation uncertainty

The key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date, thathave a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the nextfinancial year are discussed below:

Impairment losses on loans and advancesThe Bank reviews its problem loans and advances on a quarterly basis to assess whether a provision for impairmentshould be recorded in the income statement. In particular, considerable judgement by management is required in theestimation of the amount and timing of future cash flows when determining the level of provisions required. Suchestimates are necessarily based on assumptions about several factors involving varying degrees of judgment anduncertainty, and actual results may differ resulting in future changes to such provisions.

Valuation of unquoted equity investmentsValuation of unquoted equity investments is normally based on one of the following: recent arm’s length market transactions; current fair value of another instrument that is substantially the same; the expected cash flows discounted at current rates applicable for items with similar terms and risk characteristics; or other valuation models.

The determination of the cash flows and discount factors for unquoted equity investments requires significant estimation.

3. CASH AND CASH EQUIVALENTS2005

KD 000s2004

KD 000sCash in hand and on current account with banks & other financial

institutions (OFI) 27,768 22,797Balances with the Central Bank of Kuwait 175 8,639Due from banks and other financial institutions 343,446 234,151

371,389 265,587

4. TREASURY BILLS AND BONDS

Treasury bills and bonds issued by the Central Bank of Kuwait on behalf of the Ministry of Finance are classified as loansand receivables.


11

5. DUE FROM BANKS AND OTHER FINANCIAL INSTITUTIONS2005

KD 000s2004

KD 000sDue from banks and other financial institutions 86,544 90,445Loans and advances to banks and other financial institutions 152,193 87,428

238,737 177,873Due from banks and other financial institutions are classified as loans and receivables.

6. LOANS AND ADVANCES TO CUSTOMERS

Loans and advances to customers are classified as loans and receivables.

a) Balances

KuwaitKD 000s

OtherMiddle East

KD 000sEurope

KD 000s

Rest ofWorld

KD 000sTotal

KD 000s31 December 2005Trade and commerce 52,432 1,877 - 375 54,684Real estate 246,998 - - - 246,998Personal 392,886 - - - 392,886Manufacturing 5,407 - - - 5,407Construction 46,379 - - - 46,379Others 88,586 - 2,514 1,664 92,764

832,688 1877 2,514 2,039 839,118Less:Provision for impairment (39,313)

799,805

KuwaitKD 000s

OtherMiddle East

KD 000sEurope

KD 000s

Rest ofWorld

KD 000sTotal

KD 000s31 December 2004Trade and commerce 80,749 3,158 1,452 463 85,822Real estate 238,578 - - - 238,578Personal 332,338 - - - 332,338Manufacturing 19,390 826 - - 20,216Construction 42,722 - - - 42,722Others 60,902 4,711 3,102 1,746 70,461

774,679 8,695 4,554 2,209 790,137Less:Provision for impairment (38,978)

751,159b) Provisions

CashFacilitiesKD 000’s

Non CashFacilitiesKD 000’s

TotalKD 000’s

Specific General Specific GeneralAt 1 January 2005 24,663 15,940 845 6,044 47,492Exchange adjustments (56) - - - (56)Ceded to the Central Bank of Kuwait (130) - - - (130)Amounts written off (1,076) - - - (1,076)Statement of income 2,429 2,642 (162) (833) 4,076At 31 December 2005 25,830 18,582 683 5,211 50,306


12

6. LOANS AND ADVANCES TO CUSTOMERS (continued)

Provisions summarised above relate to loans and advances to Banks, other financial institutions and customers.Provision against cash facilities are deducted from loan balances and provision against non-cash facilities areincluded in other liabilities on the balance sheet.

The analysis of specific and general provisions set out above is based on the requirements of the Central Bank ofKuwait. According to the Central Bank of Kuwait instructions, a general provision of 2% on all credit facilitiesnet of certain restricted categories of collateral which are not subject to specific provision has been made.

c) Non-performing loans

Non-performing loans and advances, which either do not accrue interest or where interest is suspended, are as follows:Loans andadvancesKD 000s

ProvisionsKD 000s

Collateral heldagainst non-

performing loansKD 000s

At 31 December 2005Granted prior to the invasion of Kuwait in 1990 5,169 5,169 -Granted after liberation of Kuwait in 1991 36,666 20,661 21,341

41,835 25,830 21,341

At 31 December 2004Granted prior to the invasion of Kuwait in 1990 6,819 5,457 1,362Granted after liberation of Kuwait in 1991 41,215 19,206 19,509

48,034 24,663 20,871

7. GOVERNMENT DEBT BONDS

The Central Bank of Kuwait on behalf of the Government of the State of Kuwait, purchased the debts of Kuwaitiand Gulf Cooperation Council customers as at 1 August 1990, together with related interest up to 31 December1991 in accordance with Decree No. 32 of 1992 relating to the banking and financial sector and Law No. 41 of1993 as amended by Law No. 80 of 1995 regarding the State’s purchase of debts and the means of its collection.

The purchase value of these loans were determined in accordance with the above Decree and Laws, and wassettled by issuing bonds with a value date of 31 December 1991, maturing within a period not exceeding 20years. Interest on these bonds is paid semi-annually in arrears at a rate fixed semi-annually by the Central Bankof Kuwait. The interest rate was set at 2.38% for the six months to June 2005 and 2.9 % for the six months toDecember 2005 (2004: 1.76% and 1.88% respectively).

During 2005 the Central Bank of Kuwait redeemed bonds amounting to KD 50,636,000 (2004: KD 24,576,000).

Government debt bonds are classified as loans and receivables.

CashFacilitiesKD 000’s

Non CashFacilitiesKD 000’s

TotalKD 000’s

Specific General Specific GeneralAt 1 January 2004 29,715 17,636 862 6,211 54,424Exchange adjustments 5 - - - 5Ceded to the Central Bank of Kuwait (375) - - - (375)Amounts written off (8,584) - - - (8,584)Statement of income 3,902 (1,696) (17) (167) 2,022At 31 December 2004 24,663 15,940 845 6,044 47,492


13

7. GOVERNMENT DEBT BONDS (continued)

The Bank is required to manage the purchased debts without remuneration in accordance with Decree No. 32 of 1992 andLaw No. 41 of 1993, as amended.

The Bank has submitted to arbitration a claim for additional government debt bonds amounting to approximately KD20,000,000, plus interest, in respect of certain amounts that the Bank had not included in the value of loans that werepurchased by the Central Bank of Kuwait. The ultimate outcome of this claim cannot be presently determined.The Bank has contingent liability in respect of any adjustment that the Central Bank of Kuwait might make to the bondsamount in respect of debts that do not fulfil the conditions of the law under which they were purchased.

8. INVESTMENT SECURITIES2005

KD 000s2004

KD 000sAvailable-for-sale

- Unquoted debt securities 8,340 4,0918,340 4,091

Equity securities- Quoted 50,195 43,921- Unquoted 30,749 31,861

80,944 75,782

Held for trading- Quoted securities 4,468 4,571

93,752 84,444

Investments available-for-sale include an investment in Burgan International Holding S.A.with a capital amounting toKD 686,000 (2004: KD 686,000), a wholly owned subsidiary incorporated in Luxembourg on 10 September 2001 whichis not consolidated as it is immaterial to the Bank’s financial statements.

9. OTHER ASSETS

Other assets are classified as loans and receivables.2005

KD 000s2004

KD 000sAccrued interest receivable 18,498 13,826Other balances 5,102 4,176

23,600 18,002

10. OTHER BORROWED FUNDS

Interest rate

2005KD 000s

2004KD 000s

Medium term USD borrowing due 2009 LIBOR + 0.375% 45,990 46,415

Fixed rate KD bond due 2007 5.875% 30,000 30,000

Medium term USD borrowing due 2006 LIBOR + 0.65% - 29,470

75,990 105,885


14

10. OTHER BORROWED FUNDS (continued)

On 5 October 2004, the Bank borrowed syndicated term loans amounting to USD 157.5 million maturing in 5 years,paying interest semi-annually in arrears for USD 100 million and paying interest quarterly in arrears for USD 57.5million. The bank has the option to redeem the whole or any part of the facility without any penalty.

On 17 April 2002, the Bank issued KD 30 million of fixed rate bonds, which pay interest semi-annually in arrears. Thebonds mature in 5 years from the issue date.

On 28 July 2001, the Bank borrowed a syndicated term loan amounting to USD 100 million, paying interest semi-annually in arrears maturing in 5 years. The loan has been repaid during the year.

11. OTHER LIABILITIES2005

KD 000s2004

KD 000sAccrued interest payable 17,363 13,724Staff benefits 3,153 3,069Provisions for non-cash credit facilities 5,894 6,889Clients subscription account - 7,266Other balances 12,090 11,657

38,500 42,605

12. EQUITY AND RESERVES

a) The authorised issued and fully paid share capital comprises 860,603,940 shares (2004: 860,603,940) of 100 filseach.

b) The share premium and treasury shares reserve are not available for distribution.

c) As required by the Commercial Companies Law and the Bank’s articles of association, 10% of the profit for the yearbefore KFAS, Board of Directors remuneration and NLST has been transferred to statutory reserve. The Bank mayresolve to discontinue such annual transfers when the reserve equals 50% of paid up share capital. Distribution ofstatutory reserve is limited to the amount required to enable the payment of dividend of 5% of share capital in yearswhen accumulated profits are not sufficient for the payment of a dividend of that amount.

d) The articles of association of the Bank require that an amount of not less than 10% of the profit for the year beforeKFAS, Board of Directors remuneration and NLST be transferred annually to the voluntary reserve. There is norestriction on distribution of this reserve.

e) Treasury shares2005 2004

Number of shares held 49,471,450 27,391,450Percentage of shares held 5.75% 3.18%Cost KD 000s 18,557 10,115Market value KD 000s 26,715 9,861

Reserves equivalent to the cost of the treasury shares held are not available for distribution.

13. PROPOSED DIVIDEND

The Board of Directors recommended distribution of a cash dividend of 40 fils per share (2004: 25 fils) on outstandingshares excluding treasury shares. Such dividend if approved shall be payable to the shareholders registered in the Bank’srecords as of the date of the annual general assembly meeting.


15

14. EARNINGS PER SHARE

Earnings per share is calculated by dividing the profit for the year of KD 42,384,000 (2004: KD 29,596,000) by theweighted average number of shares outstanding during the year. The weighted average number of shares outstandingduring the year is calculated as follows:

2005 2004Weighted average number of bank’s issued and fully paid up shares 860,603,940 860,603,940Less: Weighted average number of treasury shares (43,246,245) (12,869,080)

817,357,695 847,734,860

15. SEGMENTAL ANALYSIS

a) Primary segment information.

The Bank is organised into three main business segments: Retail: incorporating private customer current accounts, savings, deposits, investment products, credit and debit

cards, consumer and housing loans. Commercial: incorporating business current accounts, deposits, overdrafts, loans and other credit facilities. Treasury: incorporating money market, foreign exchange, treasury bills and bonds, investments and fund

management.

Segment results include revenue and expenses directly attributable to a segment and an allocation of cost of funds basedon the daily weighted average balance of segment assets.

RetailKD 000s

CorporateKD 000s

TreasuryKD 000s

TotalKD 000s

At 31 December 2005Operating income 24,069 21,476 23,637 69,182Segment result 13,676 19,094 20,669 53,439Unallocated costs (9,617)Operating profit 43,822

Assets 515,721 527,077 846,914 1,889,712

Liabilities 363,852 460,646 817,914 1,642,412

RetailKD 000s

CorporateKD 000s

TreasuryKD 000s

TotalKD 000s

At 31 December 2004Operating income 24,933 17,601 11,514 54,048Segment result 17,108 18,684 4,118 39,910Unallocated costs (9,288)Operating profit 30,622

Assets 476,791 294,171 967,781 1,738,743

Liabilities 195,712 429,903 892,048 1,517,663


16

16. COMMITMENTS AND CONTINGENT LIABILITIES

a) Capital commitments

There is a capital commitment on the bank in respect of an investment in a private equity partnership at 31 December2005 amounts to USD 1,750,000 equivalent to KD 511,000 (2004: KD 1,031,000).

b) Contingent liability

There is a lawsuit against the Bank demanding it to pay an amount of KD 20 million plus interest. The Bank has launcheda counter lawsuit requesting the appointment of an expert. The case is still in court. Management believes that no loss willarise on the outcome of this lawsuit to the Bank. In the unlikely event of this liability materialising, the Bank has morethan adequate collateral in the form of marketable securities and no loss is anticipated. This opinion is reinforced byrecent written conditional agreement with the principal claimant whereby it will drop its counter claim against release ofcollateral and the satisfaction of other mutual settlement conditions.

17. TRANSACTIONS WITH RELATED PARTIES

Related parties with whom the Bank had transactions during the year primarily comprise of shareholders, directors andofficers of the Bank, the families and companies of which they are principal owners. The terms of these transactions areapproved by the Bank’s management. Significant related party transactions are as follows:

2005KD 000s

2004KD 000s

Related partiesBanker’s negotiable certificate of deposit - 11,788Due from banks and other financial institutions 48,521 5,894Loans and advances 23,582 56,823Investment securities managed by a related party 4,468 84,033Due to banks and other financial institutions 6,906 21,181Deposits from customers 14,955 12,614Commitments and contingencies 6,458 9,806

No. of Boardmembers or

executive staff

No. ofrelatedparties

2005KD 000s

2004KD 000s

Board membersLoans and advances 2 - 205 160Deposits from customers 7 1 977 687Commitments and contingencies 1 - - 30

Executive staffLoans and advances 9 - 221 253Deposits from customers 13 - 166 79Commitments and contingencies 5 - 5 4

Key management compensationRemuneration paid or accrued in relation to “key management” (deemed for this purpose to comprise Directors in relation fortheir committee service, the Chief Executive Officer and other Senior Officers) was as follows:

2005 2004KD 000 KD 000

Short term employee benefits – including salary & bonus 828 517Accrual for end of service indemnity 38 33Accrual for cost of long term incentive rights 133 14Total compensation paid to ‘key management’ 999 564


17

18. USE OF FINANCIAL INSTRUMENTS

A. Strategy in using financial instruments

By its nature the Bank’s activities are principally related to the use of financial instruments including derivatives. TheBank accepts deposits from customers at both fixed and floating rates and for various periods and seeks to earn aboveaverage interest margins by investing the funds in high quality assets. The bank seeks to increase these margins byconsolidating short term funds and lending for longer periods at higher rates whilst maintaining sufficient liquidity tomeet all claims that might fall due.The Bank also seeks to raise its interest margins by obtaining above average margins, net of provisions, through lendingto corporate and retail borrowers with a range of credit standings. Such exposures involve not just on balance sheet loansand advances but the Bank also enters into guarantees and other commitments such as letters of credit and performanceand other bonds.

The Board places limits on the level of exposure that can be taken in relation to both overnight and intra-day positions.

B. Credit risk

The Bank takes on exposure to credit risk, which is the risk that a counterparty will be unable to pay amounts in full whendue. The Bank structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relationto one borrower, or groups of borrowers, and to geographical and industry segments. Such risks are monitored on aregular basis and are subject to regular review. Limits on the level of credit risk by product, industry sector and by countryare approved by the Board.

The exposure to any one borrower, including banks and other financial institutions is further restricted by sub limitscovering on and off balance sheet exposures and daily delivery risk limits in relation to trading items such as forwardforeign exchange contracts. Actual exposures against limits are monitored daily.

Exposure to credit risk is managed through regular analysis of the ability of borrowers and potential borrowers to meetinterest and capital repayment obligations and by changing these lending limits where appropriate. Exposure to credit riskis also managed in part by obtaining collateral and corporate and personal guarantees.

Credit related commitments

The primary purpose of these instruments is to ensure that funds are available to customers as required. Guarantees,acceptances and standby letters of credit, which represent irrevocable assurances that the Bank will make payments in theevent that the customer cannot meets its obligations to third parties, carry the same credit risk as loans. Documentary andcommercial letters of credit, which are written undertakings by the Bank on behalf of the customer authorising a thirdparty to draw drafts on the Bank up to a stipulated amount under specific terms and conditions, are collateralised by theunderlying shipments of goods to which they relate and therefore carry less risk than a direct borrowing.

Commitments to extend credit represent unused portions of authorisations to extend cash credit. With respect to credit riskon commitments to extend credit, the Bank is potentially exposed to loss in an amount equal to the total unusedcommitments. However, the likely amount of loss is less than the total unused commitments since most of thesecommitments will expire or terminate without being funded.

The economic sector risk and geographical concentration within loans and advances, which form the significant portion ofassets subject to credit risk, is given in note 6.

Financial instruments with contractual amounts representing credit risk2005

KD 000s2004

KD 000sAcceptances 33,900 39,520Letters of credit 48,477 52,267Letters of guarantee 235,366 255,024

317,743 346,811Commitments to extend credit 92,078 72,272

Geographical concentration of assets, liabilities and off balance sheet items


18

18. USE OF FINANCIAL INSTRUMENTS (continued)

2005Assets

KD 000s

2004Assets

KD 000s

2005LiabilitiesKD 000s

2004LiabilitiesKD 000s

2005Off balancesheet items

KD 000s

2004Off balancesheet items

KD 000sKuwait 1,578,322 1,482,443 1,411,290 1,355,845 332,058 399,588Other MiddleEast 188,183 187,697 142,801 73,572 30,570 28,291Europe 99,758 64,117 65,351 87,764 34,261 77,521Rest of World 23,449 4,486 22,970 482 1,210 1,384

1,889,712 1,738,743 1,642,412 1,517,663 398,099 506,784

C. Currency RiskCurrency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates.The Bank takes on exposure to effects of fluctuations in the prevailing currency exchange rates on its financial positionand cash flows. The Board of Directors sets limits on the level of exposure by currency and in total for both overnight andintra-day positions, which are monitored daily. Banks net foreign currency exposures are not significant.

D. Liquidity RiskLiquidity risk is the risk that the Bank will be unable to meet its net funding requirements. The Bank is exposed to dailycalls on its available cash resources from overnight deposits, current accounts, maturing deposits, loan drawdowns,guarantees and from margin and other calls on cash settled derivatives. The Bank does not maintain cash resources tomeet all of these needs as experience shows that a minimum level of reinvestment of maturing funds can be expected.The table below summarises the maturity of assets and liabilities:

Up to 3monthsKD 000s

3 – 6months

KD 000s

6 – 12monthsKD 000s

More than12 monthsKD 000s

TotalKD 000s

At 31 December 2005:AssetsCash and cash equivalents 371,389 - - - 371,389Treasury bills and bonds 79,890 120,454 81,862 - 282,206Due from banks and other financial institutions 113,077 26,793 27,308 71,559 238,737Loans and advances to customers 221,852 56,031 87,314 434,608 799,805Government debt bonds - - - 61,621 61,621Investment securities 54,663 - - 39,089 93,752Other assets 10,849 1,447 2,853 8,451 23,600Property and equipment - - - 18,602 18,602Total assets 851,720 204,725 199,337 633,930 1,889,712

Liabilities and EquityDue to banks 236,016 7,269 - - 243,285Due to other financial institutions 91,531 - 1,461 - 92,992Certificates of deposit 25,000 - - - 25,000Deposits from customers 997,628 96,981 69,846 2,190 1,166,645Other borrowed funds - - - 75,990 75,990Other liabilities 34,362 1,613 1,588 937 38,500Equity - - - 247,300 247,300

1,384,537 105,863 72,895 326,417 1,889,712Net liquidity gap (532,817) 98,862 126,442 307,513 -


19

18. USE OF FINANCIAL INSTRUMENTS (continued)Up to 3monthsKD 000s

3 – 6months

KD 000s



TotalKD 000s

At 31 December 2004:AssetsCash and cash equivalents 265,587 - - - 265,587Treasury bills and bonds 112,549 117,565 78,920 - 309,034Due from banks and other financial institutions 71,483 46,889 15,676 43,825 177,873Loans and advances to customers 213,248 166,542 69,702 301,667 751,159Government debt bonds - - - 112,257 112,257Investment securities 48,492 - 230 35,722 84,444Other assets 9,569 820 1,791 5,822 18,002Property and equipment - - - 20,387 20,387Total assets 720,928 331,816 166,319 519,680 1,738,743Liabilities and EquityDue to banks 175,659 21,051 7,662 - 204,372Due to other financial institutions 67,367 19,309 4,736 - 91,412Certificates of deposit 20,061 5,025 - - 25,086Deposits from customers 836,947 125,556 85,289 511 1,048,303Other borrowed funds - - - 105,885 105,885Other liabilities 15,543 2,552 1,008 23,502 42,605Equity - - - 221,080 221,080

1,115,577 173,493 98,695 350,978 1,738,743Net liquidity gap (394,649) 158,323 67,624 168,702 -

Maturities of assets and liabilities have been determined on the basis of the remaining period at the balance sheet date tothe contractual maturity date. The actual maturities may differ from the maturities shown above since borrowers mayhave the right to prepay obligations with or without prepayment penalties.

E. Interest Rate RiskInterest rate risk arises from the possibility that changes in iterest rates will affect the fair value or cash flows of thefinancial instruments. The Bank takes on exposure to the effects of fluctuations in the prevailing levels of market interestrates on its financial position and cash flows. This arises as a result of mismatches or gaps in the amounts of assets andliabilities and off balance sheet instruments that mature or reprice in a given period. The Bank manages this risk bymatching the repricing of assets and liabilities through risk management strategies. The table below summarises the banksexposure to interest rate risk:


3 – 12months

KD 000s


Non interestbearingKD 000s

TotalKD 000s

Effectiveinterest rate

%At 31 December 2005:AssetsCash and cash equivalents 348,448 - - 22,941 371,389 2.450-8.500Treasury bills and bonds 79,890 202,316 - - 282,206 3.500-4.625Due from banks and other

financial institutions 113,077 125,660 - - 238,737 6.320-9.500Loans and advances to

customers 225,237 571,605 - 2,963 799,805 2.500-10.000Government debt bonds - 61,621 - - 61,621 2.380-2.900Investment securities 2,500 2,920 - 88,332 93,752 0.750-6.25Other assets - - - 23,600 23,600 -Property and equipment - - - 18,602 18,602 -

769,152 964,122 - 156,438 1,889,712Liabilities and EquityDue to banks 235,157 7,269 - 859 243,285 0.045-5.750Due to other financial

institutions 80,373 1,461 - 11,158 92,992 0.625-6.260Certificates of deposit 25,000 - - - 25,000 3.125-4.750Deposits from customers 732,263 166,827 2,190 265,365 1,166,645 0.450-6.260Other borrowed funds - 75,990 - - 75,990 4.642-5.875Other liabilities - - - 38,500 38,500 -Equity - - - 247,300 247,300 -

1,072,793 251,547 2,190 563,182 1,889,712Net interest rate gap (303,641) 712,575 (2,190) (406,744) -


20

18. USE OF FINANCIAL INSTRUMENTS (continued)




Non interestbearing

KD 000sTotal

KD 000s

Effectiveinterest rate

%At 31 December 2004:AssetsCash and cash equivalents 234,151 - - 31,436 265,587 1.00 - 5.50Treasury bills and bonds 230,114 78,920 - - 309,034 1.00 - 3.50Due from banks and other

financial institutions 71,475 106,398 - - 177,873 2.14 – 6.50Loans and advances to customers 241,032 502,066 - 8,061 751,159 1.57 – 8.75Government debt bonds - 112,257 - - 112,257 1.76 – 1.88Investment securities 4,091 - - 80,353 84,444 4.75Other assets - - - 18,002 18,002 -Property and equipment - - - 20,387 20,387 -

780,863 799,641 - 158,239 1,738,743Liabilities and EquityDue to banks 174,793 28,713 - 866 204,372 0.06 – 5.75Due to other financial institutions 62,602 24,045 - 4,765 91,412 2.38 – 6.50Certificates of deposit 20,061 5,025 - - 25,086 2.13 – 3.19Deposits from customers 655,061 210,845 511 181,886 1,048,303 1.31 – 5.81Other borrowed funds 46,415 59,470 - - 105,885 2.40 – 5.88Other liabilities - - - 42,605 42,605 -Equity - - - 221,080 221,080 -

958,932 328,098 511 451,202 1,738,743Net interest rate gap (178,069) 471,543 (511) (292,963) -

F. Operational Risk

Operations risk is the risk of loss caused by failures in operational process, people and system that supports operationalprocesses. The bank has a set of policies and procedures, which are approved by the Board of Directors and areapplied to identify, assess and supervise operational risk in addition to other types of risks relating to the bankingand financial activities of the group. Operational risk is managed by Risk Management. Risk Management ensurescompliance with policies and procedures to identify, assess, supervise and monitor operational risk as part of overallGlobal Risk Management.

The Operational Risk Management function of the bank is in line with the CBK instructions dated 14 November 1996,concerning the general guidelines for internal controls and the instructions dated 13 October 2003, regarding the soundpractices for managing and supervising operational risks in banks.

G. Equity Price Risk

Equity price risk arises from the change in fair values of equity investments. The bank manages this risk throughdiversification of investments in terms of geographical distribution and industry concentration. The majority of the bank’squoted investments are quoted on the regional Stock Exchanges.

19. DERIVATIVES

In the ordinary course of business the bank enters in to various types of transactions that involve derivative financialinstruments. A derivative financial instrument is a financial contract between two parties where payments are dependentupon movements in price of one or more underlying financial instruments, reference rate or index.

The table below shows the positive and negative fair values of derivative financial instruments, together with the notionalamounts analysed by the term to maturity. The notional amount is the amount of a derivative’s underlying asset,reference rate or index and is the basis upon which changes in the value of derivatives are measured.

The notional amounts indicate the volume of transactions outstanding at the year end and are not indicative of eithermarket or credit risk.


21

19. DERIVATIVES (continued)

31 December 2005Notional amounts by term to maturity

Notionalamount

TotalKD 000

Within1 year

KD 000

Over1 year

KD 000

Derivatives held for tradingForward foreign exchange contracts 80,356 80,356 -Interest rate swap 22,338 22,338 -

Derivatives held for hedging purposesInterest rate swap 46,224 46,224 -

148,918 148,918 -

31 December 2004Notional amounts by term to maturity

Notionalamount

TotalKD 000

Within1 year

KD 000

Over1 year

KD 000

Derivatives held for tradingForward foreign exchange contracts 159,973 159,973 -Interest rate swap 25,050 7,134 17,916

Derivatives held for hedging purposesInterest rate swap 57,605 48,762 8,843

242,628 215,869 26,759

The net positive/negative fair value of the derivative instruments as at 31 December 2005 is KD 14,000 (2004: KD679,000) and is included in the carrying amount of the other assets/other liabilities.

20. FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair values of all financial instruments, except the government debt bond due to the reason described below, are notmaterially different from their carrying values.

Fair value of the government debt bond cannot be determined with sufficient reliability as future cash flows cannot bedetermined reliably.

21. FIDUCIARY ASSETS

The bank manages investment funds on behalf of customers with net asset value of KD 221,023 at 31 December 2005(2004: KD 198,370).

22. PRESENTATION OF COMPARATIVES

Certain comparative figures for 2004 have been reclassified for comparability with the current year’s presentation. Suchreclassifications do not impact previously reported net profit or equity.

Documents

BURGAN BANK ENGLISH PROFILE