Burgan Financial Sec English · Burgan Bank S.A.K. We have audited the accompanying balance sheet of Burgan Bank S.A.K. as of 31 December 2002 and the related statements of income,

To the Shareholders

Burgan Bank S.A.K.

We have audited the accompanying balance sheet of Burgan Bank S.A.K. as of 31 December 2002 and the related statements of income,

changes in equity and cash flows for the year then ended. These financial statements are the responsibility of the Bank’s management.

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

We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we plan and perform

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

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

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

statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Bank as of 31 December 2002,

and the results of its operations and its cash flows for the year then ended in accordance with International Financial Reporting

Standards.

Also in our opinion, the statements include the disclosures required by the Commercial Companies’ Law, Law No. 32 of 1968, concerning

currency, the Central Bank of Kuwait and the organization of banking business, and subsequent amendments thereto and the Bank’s

Articles of Association, and we obtained the information we required to perform our audit. In addition, proper books of account have

been kept, physical stocktaking was carried out in accordance with recognized practice, and the accounting information given in the

Directors’ Report is in agreement with the Bank’s books. According to the information available to us, there were no violations during the

year of either the Commercial Companies’ Law, Law No. 32 of 1968, concerning currency, the Central Bank of Kuwait and the

organization of banking business, and subsequent amendments thereto or of the Bank’s Articles of Association which might have

materially affected the bank’s financial position or results of its operations.

Without qualifying our opinion we draw attention to Note 26 to the financial statements. During the course of our audit, we identified

certain fraudulent accounting irregularities in respect of an externally managed investment portfolio and reported the matter to the Board

of Directors. The Board of Directors and the new senior executive management have conducted extensive investigations and,

accordingly, a loss of KD 5 million has been recorded in the income statement for the year ended 31 December 2002. In this connection

the investment manager of this portfolio has confirmed that it is holding US$ 133 million (approximately KD 40 million) on behalf of the

Bank and will release it after certain formalities are completed.

Bader A. Al-Wazzan Waleed A. Al Osaimi Dr. Shuaib A. ShuaibLicence No. 62 A Licence No. 68 A Licence No. 33 A

PricewaterhouseCoopers Of Ernst & Young Al-Bazie & Co.

Member of RSM International

State of Kuwait

9 April 2003

20 21Burgan Bank S.A.K. - Annual Report 2002 Auditors’ Report

Auditors’ Report

2002 2001Note KD 000’s KD 000’s

ASSETSCash and short term funds 3 44,715 37,839

Treasury bills and bonds 4 296,172 246,661

Banker’s negotiable certificate of deposit 100,971 -

Deposits with banks and other financial institutions 5 214,865 305,878

Loans and advances 6 724,341 573,414

Government debt bonds 7 162,630 200,169

Investment securities 8 162,493 77,938

Property and equipment 9 19,967 17,625

Other assets 10 25,464 27,114

Total assets 1,751,618 1,486,638

LIABILITIES AND SHAREHOLDERS’ EQUITYLIABILITIESDeposits from banks and other financial institutions 11 628,330 436,592

Deposits from customers 12 831,618 790,242

Other borrowed funds 13 89,942 60,716

Other liabilities 14 19,519 19,062

Total liabilities 1,569,409 1,306,612

SHAREHOLDERS’ EQUITYShare capital 15 78,059 78,059

Proposed bonus shares 16 3,903 -

Share premium 15 64,759 64,759

Treasury shares 15 (78) -

Statutory reserve 15 12,349 11,022

Voluntary reserve 15 12,727 11,400

Treasury shares reserve 15 1,547 1,547

Retained earnings 1,312 1,326

Fair valuation reserve 1,388 (5,260)

175,966 162,853

Proposed dividend 16 6,243 17,173

Total shareholders’ equity 182,209 180,026

Total liabilities and shareholders' equity 1,751,618 1,486,638

Abdulaziz Ibrahim Al-Nabhan Sheikh. Mohammed Abdull Aziz Faisal Mohammed Al-Radwan

Chairman and Managing Director Al-Jarrah Al-Sabah Managing Director

Deputy Chairman and Acting Chief General Manager

Balance SheetAs at 31 December 2002

The attached notes 1 to 27 form an integral part of these financial statements.

2002 2001Note KD 000’s KD 000’s

Interest income 17 64,034 75,326

Interest expense 18 (42,718) (52,386)

Net interest income 21,316 22,940

Net gains from foreign currencies 1,056 967

Net gains from trading securities 945 498

Net gains from investments available-for-sale 5,687 4,572

Dividend income 1,547 1,392

Fees and commissions 16,787 10,182

Gain on sale of property and equipment - 2,379

Other operating income 157 63

Operating income 47,495 42,993

Staff expenses (9,150) (8,141)

Other operating expenses (10,306) (7,466)

Operating profit before provisions 28,039 27,386

Provision for impairment of loans and advances 6 (14,708) (5,729)

Impairment of investment securities (60) -

Operating profit 13,271 21,657

Contribution to Kuwait Foundation for the Advancement of Sciences (119) (390)

Directors' remuneration (70) (70)

National labour support tax 19 (296) (530)

Net profit for the year 12,786 20,667Earnings per share (Fils) 20 16.4 28.2

22 23Burgan Bank S.A.K. - Annual Report 2002 Financial Statements

Income StatementFor the year ended 31 December 2002


2002 2001Note KD 000’s KD 000’s

Operating activitiesOperating profit 13,271 21,657

Adjustments:

Net (gains) losses from foreign currencies (1,017) 78

Net gains from investment securities (6,632) (5,070)

Dividend income (1,547) (1,392)

Depreciation 1,789 2,037

Loans written off 19 260

Provision for impairment of loan and advances 14,708 5,729

Impairment of investment securities 60 -

Gain on sale of property and equipment - (2,379)

Operating profit before changes in operating assets and liabilities 20,651 20,920

(Increase) decrease in operating assets:

Treasury bills and bonds (49,511) (100,938)

Bankers’ negotiable certificates of deposit (100,971) -

Deposits with banks and other financial institutions 91,013 (173,764)

Loans and advances (165,511) (81,833)

Government debt bonds 37,539 15,822

Other assets 1,650 2,630

Increase (decrease) in operating liabilities:

Deposits from banks and other financial institutions 191,738 68,062

Deposits from customers 41,376 199,313

Other liabilities (28) (2,816)

Net cash from (used in) operating activities 67,946 (52,604)

Investing activitiesPurchase of investment securities (98,525) (28,052)

Sale of investment securities 27,290 17,433

Additions to property and equipment (4,131) (7,539)

Proceeds from sale of property and equipment - 20,000

Dividends received 1,547 1,392

Net cash (used in) from investing activities (73,819) 3,234

Financing activitiesOther borrowed funds 30,000 60,716

(Purchase) Sale of treasury shares (78) 14,135

Cash dividend paid (17,173) (10,463)

Net cash from financing activities 12,749 64,388

Net increase in cash and short term funds 6,876 15,018

Cash and short term funds at beginning of the year 37,839 22,821

Cash and short term funds at end of the year 3 44,715 37,839

Cash Flow Statement For the year ended 31 December 2002



Statement of Changes in EquityFor the year ended 31 December 2002

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209

1. INCORPORATION AND REGISTRATIONBurgan Bank S.A.K. (the ‘Bank’) is a public shareholding company incorporated in the State of Kuwait by Amiri Decree dated 27

December 1975 and is registered as a Bank with the Central Bank of Kuwait. The Bank’s address is P.O. Box 5389, Safat 12170,

State of Kuwait.

These financial statements have been approved for issue by the Chairman on behalf of the Board of Directors on 9 April 2003.

The Bank had 540 employees at 31 December 2002 (2001: 507).

2. SIGNIFICANT ACCOUNTING POLICIESa) Basis of presentation of financial statementsThese financial statements are prepared in accordance with applicable International Financial Reporting Standards (IFRS) issued by the

International Accounting Standards Board (IASB) and interpretations issued by the International Financial Reporting Interpretations

Committee of the IASB. The financial statements have been prepared under the historical cost basis of measurement as modified by the

revaluation of available-for-sale investment securities, financial assets and financial liabilities held for trading and all derivative contracts.

b) financial instruments

Classification and measurementIn accordance with IAS 39, financial instruments are classified as held for trading, originated financial instruments, held-to-maturity and

available-for-sale. Management determines the appropriate classification of each instrument at the time of acquisition.

Held for tradingA financial instrument is classified as “held for trading” if it is acquired or incurred principally for the purpose of generating profit from

short term fluctuations in price and subsequently measured and carried at fair value. Resultant unrealised gains and losses arising from

changes in fair value are included in the income statement. This includes all derivative financial instruments other than those held for

hedging.

Originated financial assetsThese are financial assets that are created by the enterprise by providing money directly to a borrower other than those that are

originated with the intent of being sold immediately or in the short term which are recorded as trading assets. Loans and advances

originated by the Bank by providing money directly to the borrower or to a sub-participation agent at draw down are categorised as

originated financial assets. These are carried at amortized cost using the effective yield method, less any provision for impairment.

Held to maturityFinancial assets with fixed maturity where management has both the intent and ability to hold to maturity are classified as held-to-maturity.

These are carried at amortized cost using the effective yield method, less any provision for impairment.

Available for saleThese are financial assets not included in any of the above classifications and are principally those acquired to be held for an indefinite

period of time, which may be sold in response to needs for liquidity or changes in interest rate or equity prices. These are measured and

carried at fair value and any resultant gains or losses are recognized in equity. When the “available for sale “ asset is disposed of, or

impaired, the related accumulated fair value adjustments are transferred to the income statement as gains or losses.

Notes to the Financial Statements For the year ended 31 December 2002

2. SIGNIFICANT ACCOUNTING POLICIES (continued)Recognition/de-recognitionAll financial assets are initially recognised at cost (which includes transaction costs).

A financial asset or a financial liability is recognised when the Bank becomes a party to the contractual provisions of the instrument.

A financial asset is de-recognised when the Bank loses control of the contractual rights that comprise the financial asset and a financial

liability is de-recognised when the obligation specified in the contract is discharged, cancelled or expired.

All loans and advances are recognised when cash is advanced to borrowers. Third party expenses, such as legal fees, incurred in

securing a loan are treated as part of the cost of the transaction.

All regular way purchase and sale of financial assets are recognised using settlement date accounting. Changes in the fair value between

trade date and settlement date are recognised in the income statement. Regular way purchases or sales are purchases or sales of

financial assets that require delivery of assets within the time frame generally established by regulations or conventions in the market

place.

Fair ValuesFair values of quoted instruments are based on quoted closing bid prices or using the current market rate of interest for that instrument.

Fair values for unquoted equity instruments are estimated either using applicable price/earnings or price/cash flow ratios refined to reflect

the specific circumstances of the issuer.

The fair value of a derivative is the equivalent of the unrealised gain or loss from marking to market the derivative using prevailing market

rates or internal pricing models.

ImpairmentA financial asset is impaired if its carrying amount is greater than its estimated recoverable amount. An assessment is made at each

balance sheet date to determine whether there is objective evidence that a specific financial asset, or a group of similar assets, may be

impaired. If such evidence exists, the estimated recoverable amount of that asset is determined based on the net present value of future

cash flows, discounted at original interest rates and any impairment loss is recognised in the income statement.

Loans originated by the Bank are subject to credit risk provisions for loan impairment if there is objective evidence that the Bank will not

be able to collect all amounts due. The amount of provision is the difference between the carrying amount and the recoverable amount,

being the present value of expected future cash flows, including amounts recoverable from guarantees and collateral, discounted based

on the original effective interest rate and any impairment is recognised in the income statement. The provision for impairment of loans

and advances also covers losses where there is objective evidence that probable losses are present in components of the loans and

advances portfolio at the balance sheet date. These have been estimated based on the historical patterns of losses in each component,

the credit ratings allocated to the borrowers and reflecting the current economic environment in which the borrowers operate. Loans and

advances are written off against the provision when there is no realistic prospect of recovery. Subsequent recoveries and reductions in

provisions are credited to provision for possible loan losses in the income statement.


Notes to the Financial Statements

Derivative financial instruments and hedgingDerivative financial instruments are initially recognised in the balance sheet at cost (including transaction costs) and subsequently

measured at their fair value.

Where derivative contracts are entered into by specifically designating such contracts as a fair value hedge or a cash flow hedge of

a recognised asset or liability, the Bank accounts them using hedge accounting principles, provided certain criteria are met.

Changes in the fair value of derivatives that are fair value hedges are recorded in the income statement, along with the corresponding

change in fair value of the hedged asset or liability that is attributable to that specific hedged risk.

Changes in the fair value of derivatives that are cash flow hedges are recognised in the hedge reserve in equity. Where the forecasted

transaction or firm commitment results in the recognition of an asset or of a liability, the gains and losses previously deferred in equity

are transferred from equity and included in the initial measurement of the cost of the related asset or liability. Otherwise, amounts

deferred in equity are transferred to the income statement of the period the hedged firm commitment or forecasted transaction affects

the income statement.

If such derivative transactions, while providing effective economic hedges under the Bank’s risk management policies do not qualify for

hedge accounting under the specific rules in IAS39, they are treated as derivatives held for trading. Derivatives with positive market

values (unrealised gains) are included in other assets and derivatives with negative market values (unrealised losses) are included in

other liabilities in the balance sheet. The resultant gains and losses are included in income.

c) Foreign currenciesForeign currency transactions are recorded in Kuwaiti Dinars at the rates of exchange prevailing at the trade dates of the transactions.

Monetary assets and liabilities in foreign currencies are converted into Kuwaiti Dinars at the rates of exchange prevailing at the balance

sheet date. The resulting exchange gains and losses are taken to the income statement.

d) Property and equipmentLand is stated at cost and is not depreciated. Buildings and other fixed assets are stated at cost less accumulated depreciation and

impairment losses. Property and equipment in the course of construction is not depreciated. Depreciation is provided at the following

annual rates to write-off the cost of each asset on a straight-line basis over its expected useful life:

Buildings 5 %

Equipment 20 %

Furniture 25 %

Computers 20 %

Motor vehicles 33 1/3%

The carrying amounts of property and equipment are reviewed at each balance sheet date to determine whether there is any indication

of impairment. If any such indication exists, the asset is written down to its recoverable amount and the impairment loss is recognised

in the income statement. Gains and losses on disposal of property and equipment are determined by reference to their carrying amount

and are taken into account when determining operating profit. Repairs and renewals are charged to the income statement when the

expenditure is incurred.

Notes to the Financial StatementsAs at December 31, 2002

2. SIGNIFICANT ACCOUNTING POLICIES (continued)e) Treasury sharesThe Bank’s holding in its own shares is stated at acquisition cost and is classified as a deduction from shareholders’ equity. These shares

are not entitled to any cash dividend that the Bank may propose.

Gains or losses arising on sale of treasury shares are separately disclosed under shareholders’ equity. In accordance with Central Bank of

Kuwait instructions these amounts are not available for distribution.

f) Revenue recognitionInterest income and expense are recognised in the income statement for all interest bearing instruments on an accrual basis taking

account of the principal outstanding and the rate applicable. Interest income includes coupons earned on fixed income investment and

trading securities and accrued discount and premium on treasury bills and other discounted items.

Once a financial instrument categorised as originated financial asset is impaired, interest is calculated based on future cash flows used

for the purpose of measuring the impairment.

Dividends, fee income and commissions are recognised when the right to such income is established.

g) Fiduciary assetsAssets held in trust or in a fiduciary capacity are not treated as assets of the Bank and accordingly are not included in these financial

statements.

h) ProvisionsProvisions are recognised when the bank has a present obligation (legal or constructive) arising from a past event and the costs to settle

the obligation are both probable and able to be reliably measured.

i) Repurchase and resale agreementsSecurities sold with a simultaneous commitment to repurchase at a specified future date (repos) are retained in the financial statements

as trading or available for sale financial assets and the counterparty liability recognized for amounts received. The difference between

sale and repurchase price is treated as interest expense using the effective yield method. Securities purchased with a corresponding

commitment to resell at a specified future date (reverse repos) are not recognised in the balance sheet. Amounts paid under these

agreements are included in deposits with banks and other financial institutions, loans and advances to other banks or customers as

appropriate. Securities lent to counterparties are also retained in the financial statements. The difference between purchase and resale

price is treated as interest income using the effective yield method.


Notes to the Financial Statements

3. CASH AND SHORT TERM FUNDSCash and short term funds are categorised as receivables originated by the Bank.

2002 2001KD 000’s KD 000’s

Cash in hand and on current account with other banks 14,155 17,678

Balances with the Central Bank of Kuwait 94 2,275

Money at call 30,466 17,886

44,715 37,839

4. TREASURY BILLS AND BONDSTreasury bills and bonds issued by the Central Bank of Kuwait on behalf of the Ministry of Finance and acquired from the primary market

are categorised as receivables originated by the Bank.

Other treasury bills and bonds, which were either acquired for generating a profit from short term fluctuations or are included in a portfolio

in which short term profit taking exists, are categorised as held for trading.2002 2001

KD 000’s KD 000’s

Receivables originated by the BankTreasury bills 130,019 121,208

Treasury bonds 120,674 94,069

Held for tradingTreasury bills and bonds 45,479 31,384

296,172 246,661

5. DEPOSITS WITH BANKS AND OTHER FINANCIAL INSTITUTIONSDeposits with banks and other financial institutions are categorised as receivables originated by the Bank.

2002 2001KD 000’s KD 000’s

Deposits with the Central Bank of Kuwait 36,500 125,500

Deposits with banks 105,243 136,680

Deposits with other financial institutions 73,122 43,698

214,865 305,878


6. LOANS AND ADVANCESa) Balances

OtherMiddle Rest of

Kuwait East Europe World TotalKD 000’s KD 000’s KD 000’s KD 000’s KD 000’s

31 December 2002Trade and commerce 68,811 9,644 1,477 6,082 86,014

Real estate 262,567 - - - 262,567

Personal 194,191 - - - 194,191

Others 76,983 - 1,048 - 78,031

Manufacturing 43,137 - - - 43,137

Financial 29,026 4,444 4,976 1,664 40,110

Construction 61,574 - 813 2,113 64,500

736,289 14,088 8,314 9,859 768,550

Less:

Provision for impairment (43,754)

Suspended interest on non performing loans (455)

724,341

OtherMiddle Rest of

Kuwait East Europe World TotalKD 000’s KD 000’s KD 000’s KD 000’s KD 000’s

31 December 2001Trade and commerce 49,176 290 1,512 5,514 56,492

Real estate 155,933 - - - 155,933

Personal 171,901 - - - 171,901

Others 49,444 - - - 49,444

Manufacturing 55,147 - - - 55,147

Financial 59,852 5,687 1,986 - 67,525

Construction 49,654 - 832 2,858 53,344

591,107 5,977 4,330 8,372 609,786

Less:

Provision for impairment (36,262)

Suspended interest on non performing loans (110)

573,414



b) Provisions2002 2001

KD 000’s KD 000’s

At 1 January 36,262 31,387

Exchange adjustments (143) 33

Ceded to the Central Bank of Kuwait (577) (264)

Amounts written off (6,496) (623)

Income statement 14,708 5,729

At 31 December 43,754 36,262

The method of calculation of the impairment provision for loans and advances complies in all material respects with the specific provision

requirements of the Central Bank of Kuwait. In this respect the Central Bank of Kuwait requires a general provision of 2% on all credit

facilities not subject to specific provision. The analysis of the provision set out above is based on the requirements of the Central Bank

of Kuwait.

c) Non-performing loansNon-performing loans and advances, which either do not accrue interest or where interest is suspended, are as follows:

Loans andadvances ProvisionsKD 000’s KD 000’s

At 31 December 2002Granted prior to the invasion of Kuwait in 1990 9,453 6,834

Granted after liberation of Kuwait in 1991 39,087 20,296

48,540 27,130

At 31 December 2001Granted prior to the invasion of Kuwait in 1990 9,387 7,173

Granted after liberation of Kuwait in 1991 62,701 13,926

72,088 21,099

Collateral held against non-performing loans at 31 December 2002 is KD 17,929,000 (2001: KD 39,475,000)

Of the non-performing loans and advances KD 8,674,000 (2001: KD 8,843,000) relate to non-purchased facilities that existed before the

Iraqi invasion. The Central Bank of Kuwait provisions against these loans at 31 December 2002 are KD 6,055,000 (2001: KD 6,632,000).

The provisions made at 31 December 1991 against these facilities were purchased by the Central Bank of Kuwait in accordance with

Decree No. 32/1992. Any recoveries made against these provisions are ceded to the Central Bank of Kuwait and are not included in the

income statement.


7. GOVERNMENT DEBT BONDSGovernment debt bonds are categorised as receivables originated by the Bank.

The Central Bank of Kuwait on behalf of the Government of the State of Kuwait, purchased the debts of Kuwaiti and Gulf Cooperation

Council customers as at 1 August 1990, together with related interest up to 31 December 1991 in accordance with Decree No. 32 of 1992

relating to the banking and financial sector and Law No. 41 of 1993 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 was settled by issuing bonds

with a value date of 31 December 1991, maturing within a period not exceeding 20 years. Interest on these bonds is paid semi-annually

in arrears at a rate fixed semi-annually by the Central Bank of Kuwait. The interest rate was set at 2.89 % for the six months to June 2002

and 2.45 % for the six months to December 2002 (2001: 4.95% and 3.74% respectively).

During 2002 the Central Bank of Kuwait redeemed bonds amounting to KD 37,539,000 (2001: KD 15,822,000).

The Bank is required to manage the purchased debts without remuneration in accordance with Decree No. 32 of 1992 and Law No. 41

of 1993, as amended.

The Bank has submitted to arbitration a claim for additional government debt bonds amounting to approximately KD 20 million, plus

interest, in respect of certain amounts that the Bank had not included in the value of loans that were purchased by the Central Bank of

Kuwait. The ultimate outcome of this claim cannot presently be determined.

The Bank has contingent liability in respect of any adjustment that the Central Bank of Kuwait might make to the bonds amount in respect

of debts that do not fulfil the conditions of the law under which they were purchased.



8. INVESTMENT SECURITIES2002 2001

KD 000’s KD 000’s

Available-for-saleDebt securities

Unlisted 19,062 2,551

19,062 2,551

Equity securities

Listed 34,108 25,403

Unlisted 71,176 49,984

124,346 77,938

Held-for-tradingListed bonds 38,147 -

162,493 77,938

Investments available-for-sale include an investment in Burgan International Holding S.A., a wholly owned subsidiary incorporated in

Luxembourg on 10 September 2001 which was not consolidated as it is immaterial to the Bank’s financial statements. During the year,

the Bank initiated the liquidation process of its investment in Burgan Worldwide Holding S.A., which was incorporated on 13 May 2002.

During the year, the bank sold without recourse an investment available for sale to a related party at its carrying value of KD 10.896 million

and has provided financing to that party for the same amount.

9. PROPERTY AND EQUIPMENT2002 2002 2001

2002 Accumulated Net book Net bookCost Depreciation Value Value

KD 000’s KD 000’s KD 000’s KD 000’s

Land 7,135 - 7,135 7,135

Buildings 3,600 1,976 1,624 1,246

Equipment 980 756 224 218

Furniture 1,593 1,222 371 493

Computers 7,723 5,089 2,634 3,102

Motor vehicles 147 147 - 7

Property under construction 7,979 - 7,979 5,424

29,157 9,190 19,967 17,625

The depreciation charge for 2002 is KD 1,789,000 (2001: KD 2,037,000). Total additions to property and equipment during the year

amounted to KD 4.131 million.


10. OTHER ASSETSOther assets are categorised as receivables originated by the Bank.

2002 2001KD 000’s KD 000’s

Accrued interest receivable 13,257 8,710

Other balances 12,207 18,404

25,464 27,114

11. DEPOSITS FROM BANKS AND OTHER FINANCIAL INSTITUTIONS2002 2001

KD 000’s KD 000’s

Deposits from banks 452,572 301,431

Deposits from financial institutions 175,758 135,161

628,330 436,592

Deposits from banks and other financial institutions include an amount of US$ 148 million equivalent to KD 44 million (2001 – Nil)

representing deposits obtained against a investment portfolios managed by a third party.

12. DEPOSITS FROM CUSTOMERS2002 2001

KD 000’s KD 000’s

Current accounts 112,704 93,798

Savings accounts 50,217 72,585

Time deposits 668,697 623,859

831,618 790,242

13. OTHER BORROWED FUNDS2002 2001

Interest rate KD 000’s KD 000’s

Fixed rate KD bond due 2006 6.75 % 30,000 30,000

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

Medium term USD borrowing due 2006 LIBOR + 0.65 % 29,942 30,716

89,942 60,716

During the year, the bank issued KD 30 million of fixed rate bonds, which pay interest semi-annually in arrears. The bonds mature 5 years

from the issue date of nominal value.

On 11 June 2001, the Bank issued KD 30 million of fixed rate bonds, which pay interest semi-annually in arrears. The bonds mature 5

years from the issue date at nominal value. The Bank has a call option to redeem all or some of the bonds on or after 11 June 2004 at

face value. The bondholders have a put option to redeem all or some of the bonds on 11 June 2004 at face value.

On 28 July 2001, the Bank was granted a USD 100 million syndicated term loan, paying interest semi-annually in arrears. The term loan

matures 5 years from receipt.



14. OTHER LIABILITIES2002 2001

KD 000’s KD 000’s

Accrued interest payable 10,849 12,165

Staff benefits 2,829 2,234

Other balances 5,841 4,663

19,519 19,062

15. SHAREHOLDERS’ EQUITY AND RESERVESa) The authorised issued and fully paid share capital comprises 780,593,142 shares (2001: 780,593,142) of 100 fils each.

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 year has been

transferred to statutory reserve. The Bank may resolve to discontinue such annual transfers when the reserve equals 50% of paid up

share capital. Distribution of statutory reserve is limited to the amount required to enable the payment of dividend of 5% of share

capital in years when 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 net profit for the year be transferred annually

to the voluntary reserve.

e) Treasury shares2002 2001

Number of shares held 280,000 -

Percentage of shares held 0.04% -

Cost KD 000s 78 -

Fair value KD 000s 90 -

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

16. PROPOSED DIVIDENDThe Board of Directors recommended distribution of a cash dividend of 8 fils per share (2001: 22 fils) on outstanding shares excluding

treasury shares, and bonus shares of 5% (2001: nil). Such dividend if approved shall be payable to the shareholders registered in the

Bank’s records as of the date of the annual general assembly meeting.


17. INTEREST INCOME2002 2001

KD 000’s KD 000’s

Treasury bills and bonds 9,967 9,709

Deposits with banks and other financial institutions 8,293 10,952

Loans and advances 40,871 45,543

Government debt bonds 4,903 9,122

64,034 75,326

18. INTEREST EXPENSE2002 2001

KD 000’s KD 000’s


Deposits from customers 25,880 33,836

Other borrowed funds 3,273 1,129

42,718 52,386

19. NATIONAL LABOUR SUPPORT TAXUnder the terms of Ministry of Finance Law No. 26 of 2001 the Bank is required to deduct 2.5% of net profit as a contribution to National

Labour Support.

20. EARNINGS PER SHAREEarnings per share is calculated by dividing the net profit for the year of KD 12,786,000 (2001: KD 20,667,000) by the weighted average

number of shares outstanding during the year. The weighted average number of shares outstanding during the year is calculated as

follows:2002 2001

KD 000’s KD 000’s

Weighted average number of bank’s issued and fully paid up shares 780,593,142 780,593,142

Less: Weighted average number of treasury shares (69,041) (47,545,473)

780,524,101 733,047,669



21. 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.

Retail Commercial Treasury TotalKD 000’s KD 000’s KD 000’s KD 000’s

At 31 December 2002Operating income 16,534 13,987 16,974 47,495Segment result 11,516 (2,133) 15,185 24,568Unallocated costs (11,297)Operating profit 13,271Assets 156,980 608,639 985,999 1,751,618Liabilities 267,196 220,492 1,081,721 1,569,409

At 31 December 2001Operating income 12,039 12,964 17,990 42,993Segment result 5,485 7,262 16,520 29,267Unallocated costs (7,610)Operating profit 21,657Assets 107,362 485,664 893,612 1,486,638Liabilities 290,526 297,632 718,454 1,306,612

22. COMMITMENTS AND CONTINGENT LIABILITIESa) Capital commitments:At 31 December 2002 the Bank had capital commitments in respect of construction in progress amounting to KD 1,414,000 (2001: KD2,267,000) and investment in a private equity partnership amounting to USD 4,500,000 equivalent to KD 1,347,000 (2001: Nil).

b) Operating lease commitments

The future minimum lease payments under non-cancellable building operating lease are:2002 2001

KD 000’s KD 000’s

Not later than one year 2,000 2,000Later than one year and not later than five years 8,000 8,000Later than five years 12,000 14,000

22,000 24,000

c) Contingent liabilityThere is a lawsuit against the Bank demanding it to pay an amount of KD 20 million plus interest. The Bank has launched a counterlawsuit requesting the appointment of an expert. The case is still in court. Management believes that no loss will arise on the outcome of this lawsuit to the Bank.


23. TRANSACTIONS WITH RELATED PARTIESRelated parties with whom the Bank had transactions during the year primarily comprise of shareholders, directors and officers of the

Bank, the families and companies of which they are principal owners. The terms of these transactions are approved by the Bank’s

management in accordance with the Bank’s normal policies and procedures. Significant related party transactions included in the

financial statements are as follows:2002 2001

KD 000’s KD 000’s

Related parties:Banker’s negotiable certificate of deposit 14,971 -

Deposits with banks and other financial institutions 32,306 26,577

Loans and advances 26,709 50,943

Investment securities managed by related parties 46,888 49,923

Other assets - 11,569


Deposits from customers 628 4,887

Contingencies and commitments 7,031 8,702

Net gains from investment securities - 1,399

No. of Boardmembers or No. of related 2002 2001

executive staff parties KD 000’s KD 000’s

Board members:Loans and advances 2 1 1,743 1,101

Deposits from customers 4 2 81 113

Contingencies and commitments 1 1 25 35

Executive staff:Loans and advances 8 - 344 333

Deposits from customers 10 - 199 328

Contingencies and commitments 1 - 1 1

24. USE OF FINANCIAL INSTRUMENTSa) Strategy in using financial instruments By its nature the Bank’s activities are principally related to the use of financial instruments including derivatives. The Bank accepts

deposits from customers at both fixed and floating rates and for various periods and seeks to earn above average interest margins by

investing the funds in high quality assets. The bank seeks to increase these margins by consolidating short term funds and lending for

longer periods at higher rates whilst maintaining sufficient liquidity to meet all claims that might fall due.

The Bank also seeks to raise its interest margins by obtaining above average margins, net of provisions, through lending to corporate

and retail borrowers with a range of credit standings. Such exposures involve not just on balance sheet loans and advances but the

Bank also enters into guarantees and other commitments such as letters of credit and performance and 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 riskThe Bank takes on exposure to credit risk, which is the risk that a counterparty will be unable to pay amounts in full when due. The Bankstructures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or groups of borrowers, and to geographical and industry segments. Such risks are monitored on a regular basis and are subject to regular review.Limits on the level of credit risk by product, industry sector and by country are approved by the Board.

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

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

Credit related commitmentsThe primary purpose of these instruments is to ensure that funds are available to customers as required. Guarantees and stand by letters of credit, which represent irrevocable assurances that the Bank will make payments in the event that the customer cannot meets its obligations to third parties, carry the same credit risk as loans. Documentary and commercial letters of credit, which are writtenundertakings by the Bank on behalf of the customer authorising a third party to draw drafts on the Bank up to a stipulated amount underspecific terms and conditions, are collateralised by the underlying shipments of goods to which they relate and therefore carry less riskthan a direct borrowing.

Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans. With respect to credit risk on commitments to extend credit, the Bank is potentially exposed to loss in an amount equal to the total unused commitments.However, the likely amount of loss is less than the total unused commitments since most of these commitments will expire or terminatewithout being funded

The economic sector risk and geographical concentration within loans and advances, which form the significant portion of assets subjectto credit risk, is given in note 6.

Financial instruments with contractual amounts representing credit risk2002 2001

KD 000’s KD 000’s

Acceptances 15,086 10,577Letters of credit 40,890 33,574Letters of guarantee 164,376 172,026

220,352 216,177Commitments to extend credit 51,047 52,502

Financial instruments with contractual amounts that exceed credit risk2002 2001

KD 000’s KD 000’s

Foreign exchange contracts 139,102 71,795

The credit risk exposure on the foreign exchange contracts is limited to any gain on revaluation and is included in the carrying amount of other assets.


24. USE OF FINANCIAL INSTRUMENTS (continued)Geographical concentration of assets, liabilities and off balance sheet items

2002 2001Liabilities & Liabilities & 2002 2001

2002 2001 Shareholders’ Shareholders’ Off balance Off balanceAssets Assets Equity Equity sheet items sheet items

KD 000’s KD 000’s KD 000’s KD 000’s KD 000’s KD 000’s

Kuwait 1,514,265 1,371,851 1,486,200 1,286,914 171,343 164,660

Other Middle East 130,731 55,653 137,794 140,739 25,937 23,534

Europe 81,991 48,260 89,966 39,569 78,177 59,944

USA 14,049 1,963 30,541 15,205 44,590 26,354

Rest of World 10,582 8,911 7,117 4,211 39,407 13,480

1,751,618 1,486,638 1,751,618 1,486,638 359,454 287,972

c) Currency RiskThe Bank takes on exposure to effects of fluctuations in the prevailing currency exchange rates on its financial position and cash flows.

The Board of Directors sets limits on the level of exposure by currency and in total for both overnight and intra-day positions, which are

monitored daily. The table below summarises the Banks material net foreign currency exposures.2002 2001

KD 000’s KD 000’s

Net assets (liabilities)

US Dollars (13,926) (187)

Euros 7 2,317

Swiss Francs 53 140

Others 5,781 1,846

(8,085) 4,116



d) Liquidity RiskThe Bank is exposed to daily calls on its available cash resources from overnight deposits, current accounts, maturing deposits, loandrawdowns, guarantees and from margin and other calls on cash settled derivatives. The Bank does not maintain cash resources to meetall of these needs as experience shows that a minimum level of reinvestment of maturing funds can be expected. The table belowsummarises the maturity of assets and liabilities:

Up to 3 3 to 6 6 to 12 more thanmonths months months 12 months Total

KD 000’s KD 000’s KD 000’s KD 000’s KD 000’s

At 31 December 2002:AssetsCash and short term funds 44,715 - - - 44,715Treasury bills and bonds 126,142 32,638 98,648 38,744 296,172Banker’s negotiable certificate of deposit 80,971 20,000 - - 100,971Deposits with banks and other financial institutions 166,885 30,459 14,694 2,827 214,865Loans and advances 65,844 45,452 169,373 443,672 724,341Government debt bonds - - - 162,630 162,630Investment securities - - - 162,493 162,493Property and equipment - - - 19,967 19,967Other assets 17,084 465 1,178 6,737 25,464

501,641 129,014 283,893 837,070 1,751,618Liabilities and shareholders’ equityDeposits from banks and other financial institutions 493,583 72,459 62,006 282 628,330Deposits from customers 633,767 109,072 87,452 1,327 831,618Other borrowed funds - - - 89,942 89,942Other liabilities 10,233 1,785 1,255 6,246 19,519Shareholders’ equity - - - 182,209 182,209

1,137,583 183,316 150,713 280,006 1,751,618Net liquidity gap (635,942) (54,302) 133,180 557,064 -

At 31 December 2001:AssetsCash and short term funds 37,839 - - - 37,839Treasury bills and bonds 148,425 41,709 48,474 8,053 246,661Deposits with banks and other financial institutions 216,563 29,499 37,904 21,912 305,878Loans and advances 76,859 67,554 108,846 320,155 573,414Government debt bonds - - - 200,169 200,169Investment securities - - - 77,938 77,938Property and equipment - - - 17,625 17,625Other assets 21,298 709 970 4,137 27,114

500,984 139,471 196,194 649,989 1,486,638Liabilities and shareholders’ equityDeposits from banks and other financial institutions 398,180 37,130 1,000 282 436,592Deposits from customers 514,348 168,127 100,566 7,201 790,242Other borrowed funds - - - 60,716 60,716Other liabilities 12,348 2,784 1,582 2,348 19,062Shareholders’ equity - - - 180,026 180,026

924,876 208,041 103,148 250,573 1,486,638Net liquidity gap (423,892) (68,570) 93,046 399,416 -

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


24. USE OF FINANCIAL INSTRUMENTS (continued)e) Interest Rate RiskThe Bank takes on exposure to the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash

flows. This arises as a result of mismatches or gaps in the amounts of assets and liabilities and off balance sheet instruments that mature

or reprice in a given period. The Bank manages this risk by matching the repricing of assets and liabilities through risk management

strategies. The table below summarises the banks exposure to interest rate risk:

Up to 3 3 to 12 more than Non interestmonths months 12 months bearing Total Effective

KD 000’s KD 000’s KD 000’s KD 000’s KD 000’s interest rate %

At 31 December 2002:AssetsCash and short term funds 29,621 - - 15,094 44,715 1.4 – 3.25

Treasury bills and bonds 125,698 170,474 - - 296,172 2 - 3.75

Banker’s negotiable certificate of deposit 80,971 20,000 - - 100,971 2.01 - 3.34

Deposits with banks and other

financial institutions 182,350 29,427 - 3,088 214,865 0.13 - 6.90

Loans and advances 551,684 172,657 - - 724,341 1.1 – 8.25

Government debt bonds - 162,630 - - 162,630 2.45

Investment securities - 15,972 3,091 143,430 162,493 2.01 – 5.25

Property and equipment - - - 19,967 19,967 -

Other assets - - - 25,464 25,464 -

970,324 571,160 3,091 207,043 1,751,618

Liabilities and shareholders’ equityDeposits from banks and other


Deposits from customers 535,972 196,464 1,327 97,855 831,618 0.08 - 7.38

Other borrowed funds - 29,942 60,000 - 89,942 2.34 - 6.75

Other liabilities - - - 19,519 19,519 -

Shareholders’ equity - - - 182,209 182,209 -

956,650 429,130 61,327 304,511 1,751,618Net interest rate gap 13,674 142,030 (58,236) (97,468) -



Up to 3 3 to 12 more than Non interestmonths months 12 months bearing Total Effective

KD 000’s KD 000’s KD 000’s KD 000’s KD 000’s interest rate %

At 31 December 2001:AssetsCash and short term funds 17,886 - - 19,953 37,839 1.8 - 3.5

Treasury bills and bonds 165,784 72,824 8,053 - 246,661 3.75 - 7.5

Deposits with banks and other


Loans and advances 558,312 15,102 - - 573,414 2.4 - 11.3

Government debt bonds - 200,169 - - 200,169 3.74

Investment securities - 2,551 - 75,387 77,938 8.0

Property and equipment - - - 17,625 17,625 -

Other assets - - - 27,114 27,114 -

961,477 353,398 8,053 163,710 1,486,638

Liabilities and shareholders’ equityDeposits from banks and other


Deposits from customers 453,721 268,693 7,201 60,627 790,242 1.8 - 7.4

Other borrowed funds - 30,716 30,000 - 60,716 4.3 - 6.8

Other liabilities - - - 19,062 19,062 -

Shareholders’ equity - - - 180,026 180,026 -

835,581 333,411 37,201 280,445 1,486,638Net interest rate gap 125,896 19,987 (29,148) (116,735) -


25. FAIR VALUE OF FINANCIAL INSTRUMENTSFair value represents the amount at which an asset could be exchanged or a liability settled between knowledgeable parties on an arm’s

length basis.

The carrying amounts of the Bank’s financial assets and liabilities generally approximates their fair values except in the cases specified

below. Bid prices are used to estimate fair values of assets whereas offer prices are applied for liabilities.

The bases used for estimating fair value for those financial assets and liabilities not represented on the Bank’s balance sheet at their fair

value are as follows:

a) Interest bearing financial instrumentsThe fair value of interest bearing financial instruments is based on prevailing market rates for similar instruments with similar credit risk

and residual maturities.

b) Government debt bondIt was not practicable to determine the fair value of government debt bonds with sufficient reliability due to the following factors:

• Government debt bonds do not carry fixed or determinable amounts of future payments until maturity.

• There is no secondary market in which government debt bonds are traded.

• There are no comparable instruments having substantially similar terms, conditions and characteristics as the government debt bonds.

c) Other on-balance sheet financial instrumentsThe fair values of all other on-balance sheet financial instruments approximate their respective book values due to their short term nature.

26. FRAUDULENT ACCOUNTING IRREGULARITIESDuring the course of their audit, the external auditors identified certain fraudulent accounting irregularities in respect of an externally

managed investment portfolio and reported the matter to the Board of Directors who immediately suspended certain members of the

senior executive management team who were involved with these irregularities. The Board of Directors and the new senior executive

management undertook extensive investigations and have concluded that these accounting irregularities equivalent to KD 5 million

represent realized losses that have now been recorded in the income statement for the year ended 31 December 2002. The Board of

Directors and the new senior executive management are of the opinion that no further material loss has arisen in this regard and that

there are no further material accounting irregularities. In this connection, the investment manager of this portfolio has confirmed that it

is holding US$ 133 million (approximately KD 40 million) on behalf of the Bank and will release it after certain formalities are completed.

27. PRESENTATION OF COMPARATIVESCertain comparative figures for 2001 have been reclassified for comparability with the current year’s presentation.




Auditor’s ReportContact Directory

Main BranchAhmad Al-Jaber Street, Sharq, Kuwait P.O.Box: 5389, Postal Code 13054 SafatTel: 2439000 (20 Lines) Telex:23309, 22730 Fax:[email protected]

Al-AhmadiMoustafa Karam Square, Area 3, East Al-Ahmadi, Al-Ahmadi Tel:3984654, 3987372 Fax: [email protected]

Al-FahaheelAl-Dabbous Street, Al-Fahaheel Tel.: 3918091, 3918093, 3918103 Fax:[email protected]

Shuwaikh IndustrialBanks' Area, Shuwaikh Indusrial AreaTel.:4830698, 4830924, 4830854 Fax:4821891 [email protected]

Al-ShaheedAl-Shaheed Tower, Khalid Bin Waleed St., KuwaitTel.: 2410818, 2410813 Fax: [email protected]

HawalliSh.Duaij Al-Sabah Bldg., Beirut Street, Hawalli Tel.: 2655763, 2655769, 2655870 Fax:[email protected]

Al-JahraTyma'a Central market, Al-Jahra Co-operative, Jahra Tel.: 4579166, 4578618 Fax: [email protected]

Abdulla Al-SalemAbdulla Al-Salem Street, Kuwait Tel.: 2417377, 2417411 Fax: [email protected]

SabhanPlot No.2, Area 5, Sabhan Industrial Area,Sabhan Tel.: 4738276, 4719039 Fax: [email protected]

Al-QureinStreet No. 153, Area 5, Sector B(1), Al-Qurein Tel.:5425316, 5425326, 5432478, 5432479 Fax: [email protected]

Al-SalmiyaSalem Al-Mubarak Street, Salmiya Tel.: 5721635, 5721627, 5721629 Fax: [email protected]

Fahed Al-SalemFahed Al-Salem Street, KuwaitTel.: 2428451/2, 2428424 Fax: [email protected]

Shuwaikh ResidentialStreet No.21, Area 2, Shuwaikh (B)Tel.: 4839285, 4813799, 4843287 Fax: [email protected]

Adailiya BranchAdailiya Co-op., Adailiya Area Tel: 2571046- 2513438/9 Fax:[email protected]

Jahra Commercial BranchAl-Kheima Mull, Commercial Area, Jahra

Tel. 4558192/3/4 - 4558147 Fax: [email protected]

Airport BranchAirport Mall, Kuwait AirportTel.: 4344256 - 4331767 Ext. 1122/3/4 Fax: [email protected]

Marina MallBuilding No. 168, Salem Al-Mubarak St., Block 7, SalmiyaTel.: 2244530/1/2/4/6/7 Fax: [email protected]

Private BankingShaheed Tower, Khalid Ibn Waleed Street, Kuwait P.O.Box: 5389 Safat 13054, State of KuwaitTel:2452430/1 - 2452328/9 Fax: [email protected]

Documents

Burgan Financial Sec English · Burgan Bank S.A.K. We have audited the accompanying balance sheet of Burgan Bank S.A.K. as of 31 December 2002 and the related statements of income,